Mital Tiene’s investment portfolio currently consists of stocks in two companies, 40% in Drysdahl Banking and the remaining amount in Clampett Oil. Performance measurement information for these two stocks is given in the table below: Drysdahl Banking stock, 40% weight Expected Return 10.50% Standard Deviation 8.5% Clampett Oil stock, 60% weight Expected Return 16.55% Standard Deviation: 25.0% The answer states the standard deviation of returns is 15.5% How did they calculate this?
Whats the question?
How they obtained 15.5 % for the standard deviation of returns
I calculate it as 15.38 %
They haven’t given you a covariance or correlation?
I think u need to post the proper question there must be a correlation or covariance figure
My apologies, I missed the lower half The covariance between the two stocks is 0.001. Tiene is considering adding a third stock, Hilbilee Investors. Hilbilee Investor’s correlation coefficient with the current portfolio is 0.38.
Let’s break it into parts: Drysdahl Banking stock, 40% weight-------(a) Expected Return 10.50% Standard Deviation 8.5% Clampett Oil stock, 60% weight------------(b) Expected Return 16.55% Standard Deviation: 25.0% Formula: Variance of portfolio = [Weight(a) x Std(a)]*2 + [Weight(b) x Std(b)]*2 + 2(Wa)(Wb)(Covariance-a,b) Substituting values = (.4 x .085)*2 + (.6 x .25)*2 + 2(.4)(.6)(.001) = .001156 + .0225 + .00048 Variance = .024136 Standard deviation is square root of this which is 0.1553557 or 15.5% Hope it helps