Instruction 16.2:Use the information to answer the following question(s).
A U.S. investor is considering a portfolio consisting of 60% invested in the U.S. equity index fund and 40% invested in the British equity index fund. The expected returns for the funds are 10% for the U.S. and 8% for the British, standard deviations of 20% for the U.S. and 18% for the British, and a correlation coefficient of 0.15 between the U.S. and British equity funds.
-Refer to Instruction 16.2. What is the standard deviation of the proposed portfolio?
A)38.00
B)19.20
C)19.00
D)14.45

Question

Quizplus · Accepted Answer

The standard deviation of the portfolio is calculated using the formula for the standard deviation of a two-asset portfolio: √[(w₁σ₁)² + (w₂σ₂)² + 2w₁w₂σ₁σ₂ρ], where w₁ and w₂ are the weights, σ₁ and σ₂ are the standard deviations, and ρ is the correlation coefficient. Plugging in the values: √[(0.6*0.2)² + (0.4*0.18)² + 2*0.6*0.4*0.2*0.18*0.15] = 14.45%.