The expected return on ZV next year is 12% with a standard deviation of 20%. The expected return on TNA next year is 24% with a standard deviation of 30%. The correlation between the two stocks is -.6. If Hannah makes equal investments in ZV and TNA, what is the standard deviation of her portfolio?
A) 22.47%.
B) 12.04%
C) 1.45%.
D) 16.00%.

Question

Quizplus · Accepted Answer

The standard deviation of a portfolio with two assets can be calculated using the formula: √[(w1^2 * σ1^2) + (w2^2 * σ2^2) + (2 * w1 * w2 * σ1 * σ2 * ρ)], where w1 and w2 are the weights of the assets, σ1 and σ2 are the standard deviations, and ρ is the correlation. With equal investments, w1 = w2 = 0.5. Plugging in the values: √[(0.5^2 * 0.2^2) + (0.5^2 * 0.3^2) + (2 * 0.5 * 0.5 * 0.2 * 0.3 * -0.6)] = 12.04%.

The Expected Return on ZV Next Year Is 12% with a Standard