A portfolio has 50% of its value in IBM shares and the rest in Microsoft (MSFT).The volatility of IBM and MSFT are 39% and 35%,respectively,and the correlation between IBM and MSFT is 0.What is the standard deviation of the portfolio?

Question

Quizplus · Accepted Answer

The formula to calculate the standard deviation of a portfolio is as follows:
σp = √(w1^2 × σ1^2 + w2^2 × σ2^2 + 2 × w1 × w2 × σ1 × σ2 × ρ12)
where
w1 = weight of the first asset
w2 = weight of the second asset
σ1 = volatility of the first asset
σ2 = volatility of the second asset
ρ12 = correlation between the two assets
Using the given values,
w1 = 0.5, w2 = 0.5
σ1 = 39%, σ2 = 35%
ρ12 = 0
σp = √(0.5^2 × 39%^2 + 0.5^2 × 35%^2 + 2 × 0.5 × 0.5 × 39% × 35% × 0) = 26.2%
Therefore, the correct answer is D) 26.2%.

A Portfolio Has 50% of Its Value in IBM Shares