The volatility of Woolworth's share price is 15% and that of Reckon's shares is 15%. When I hold both shares in my portfolio and the returns have zero correlation, the overall volatility of returns of the portfolio is:

Question

Quizplus · Accepted Answer

When two assets with zero correlation are combined, the overall volatility of the portfolio is calculated as the square root of the weighted sum of the squared volatilities. The formula is:
Portfolio Volatility = [(Weight of Asset A) x (Volatility of Asset A)]^2 + [(Weight of Asset B) x (Volatility of Asset B)]^2 + 2 x (Weight of Asset A) x (Volatility of Asset A) x (Weight of Asset B) x (Volatility of Asset B) x (Correlation between Asset A and B)
Since the correlation is zero, the third term drops off. Thus, the portfolio volatility will be less than the weighted average of the individual volatilities, which is (0.5 x 15%) + (0.5 x 15%) = 15%. Therefore, the correct answer is C.

The Volatility of Woolworth's Share Price Is 15% and That