# Schweser - Book 4 Page 113

Portfolio Risk Return for a Two Asset Portfolio - Can somone help me come up with how they calculate the standard deivations for each of the possible combinations of caffeine plus and sparklin? ie (15%, 13.7%, 13.7%, 14.9% etc. I understand how to get E(Rp) (just use the weights of each and add together). Thanks for your help!

Panny, the first step would be to determine the covariance between caffeine and sparkling, using the formular covcs=correlationcs x std deviation c x std deviation s (=0.3x0.15x0.2), which gives you 0.009. Given that we have the standard deviations of c and s as 0.15 and 0.2 respectively, and w1 and w2 combinations from (1,0),(0.8,0.2),(0.6,0.4),(0.4,0.6),(0.2,0.8), and (0,1); if we apply this to the formular of two assets we end up with the given portfolio deviations. For instance, weights (0.8,0.2) =(((0.8)2*(0.15)2+(0.2)2*(0.2)2+(2*0.8*0.2*0.009))1/2 =13.74% (Please note the first two parts of the eqn are raised to the power of 2) Hope this helps. Joe

thanks wambua joeâ€¦this really helped. i was having problems with the standard deviation of a portfolio formula, but ive been hammering away at it and it is FINALLY sinking in. thanks again for your help!!