Stocks A and B are perfectly negatively correlated ( = -1)and their standard deviations are 0.20 and 0.30 respectively.What is the standard deviation of a portfolio with 50% invested in Stock A and 50% invested in Stock B?
A) 5%
B) 6%
C) 7%
D) 8%
E) 9%

Question

Stocks A and B are perfectly negatively correlated (  = -1)and their standard deviations are 0.20 and 0.30 respectively.What is the standard deviation of a portfolio with 50% invested in Stock A and 50% invested in Stock B?
A) 5% 
B) 6% 
C) 7% 
D) 8% 
E) 9%

Quizplus · Accepted Answer

From the text we know the equation for the standard deviation of a 2 asset portfolio is: σ_p = 11ea7fdb_fc05_df9f_a768_95a014d2acd5_TB2902_11 Substituting the correlation of -1 we have: σ_p = 11ea7fdb_fc05_dfa0_a768_037645f1cacb_TB2902_11 σ_p = 11ea7fdb_fc05_dfa1_a768_911abb04c747_TB2902_11 σ_p = 11ea7fdb_fc05_dfa2_a768_1ffcbf51dfd8_TB2902_11 σ_p = 0.05

Stocks a and B Are Perfectly Negatively Correlated