Use the following to answer the question(s) below.
As a result of the financial crisis in the fall of 2008, when the government intervened to help the economy, an investor was considering various strategies for her money and the estimated profits would depend on how successful the intervention would be in helping the economy. The estimated annual return for two different investment strategies are shown in the following table.
-The standard deviation associated with the investment strategy of allocating 80% to stocks and 20% to bonds is
A) $4,500.
B) $2,250.
C) $3,473.
D) $2,567.
E) $1,782.

Question

Use the following to answer the question(s) below.
As a result of the financial crisis in the fall of 2008, when the government intervened to help the economy, an investor was considering various strategies for her money and the estimated profits would depend on how successful the intervention would be in helping the economy. The estimated annual return for two different investment strategies are shown in the following table. 
-The standard deviation associated with the investment strategy of allocating 80% to stocks and 20% to bonds is
A) $4,500. 
B) $2,250. 
C) $3,473. 
D) $2,567. 
E) $1,782.

Quizplus · Accepted Answer

To calculate the standard deviation of the investment strategy that allocates 80% to stocks and 20% to bonds, we need to use the formula for the weighted average of the standard deviations:

σ = √[w1*(σ1)^2 + w2*(σ2)^2],

where w1 and w2 are the weights of stocks and bonds, and σ1 and σ2 are the standard deviations of stocks and bonds.

Plugging in the values from the table, we get:

σ = √[0.8*(0.18)^2 + 0.2*(0.085)^2]
σ ≈ $3,473

Therefore, the standard deviation associated with the investment strategy of allocating 80% to stocks and 20% to bonds is approximately $3,473.

The best choice is C.

Use the Following to Answer the Question(s) Below