Consider the following expected returns, volatilities, and correlations: The volatility of a portfolio that is equally invested in Duke Energy and Microsoft is closest to ________.

Question

Consider the following expected returns, volatilities, and correlations:  The volatility of a portfolio that is equally invested in Duke Energy and Microsoft is closest to ________.

Quizplus · Accepted Answer

The volatility of the portfolio can be calculated using the formula:
Portfolio Volatility = sqrt(w1^2 x Volatility of Stock 1^2 + w2^2 x Volatility of Stock 2^2 + 2 x w1 x w2 x Volatility of Stock 1 x Volatility of Stock 2 x Correlation)
where w1 and w2 are the weights of the two stocks in the portfolio.
For an equally invested portfolio, w1 = w2 = 0.5
Using the given values, we get:
Portfolio Volatility = sqrt(0.5^2 x 0.16^2 + 0.5^2 x 0.20^2 + 2 x 0.5 x 0.5 x 0.16 x 0.20 x 0.80)
= 0.09 or 9.0% (rounded to one decimal place)
Therefore, the answer is B, 9.0%.

Consider the Following Expected Returns, Volatilities, and Correlations: the Volatility