Consider an equally weighted portfolio that contains five stocks.If the average volatility of these stocks is 40% and the average correlation between the stocks is .5,then the volatility of this equally weighted portfolio is closest to:
A) 0.17
B) 0.44
C) 0.41
D) 0.19

Question

Quizplus · Accepted Answer

B) Variance of an equally Weighted Portfolio = 11ea7e5a_6e67_47c3_9a0a_392607a9875f_TB1623_11 (Average Variance of Individual Stocks) + (1 - 11ea7e5a_6e67_47c4_9a0a_dfe34b647487_TB1623_11 )(Average covariance between the stocks) Var = (1 / 5)(.40)² + (1 - 1/5)(.5)( 11ea7e5a_6e67_47c5_9a0a_1f70c72c7a49_TB1623_11 ( 11ea7e5a_6e67_6ed6_9a0a_f76dfbc40b87_TB1623_11 Var = .2(.16) + .8(.5)(.40) = .192 stdev = 11ea7e5a_6e67_6ed7_9a0a_855c8e29b597_TB1623_11 = .438

Consider an Equally Weighted Portfolio That Contains Five Stocks