Calculate the standard deviation of two assets: Lind Distributing, Henry Manufacturing
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The standard deviation of the rate of return for Lind Distributing is 18% while that for Henry Manufacturing is 22%. If the correlation between their returns is -0.25, what is the standard deviation of a portfolio composed 70% of Lind and 30% of Henry common stock?
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Solution Preview
To find the standard deviation of a portfolio composed of the two assets you need to first compute the variance of the portfolio and then you can find the standard deviation by taking the square root of the variance. To find the variance of the portfolio, call it Vp, you have to use the following equation:
Vp=w1^2*V1+w2^2*V2+2*w1*w2*S1*S2*C12
Where 'w1' is the ...
Solution Summary
The solution carefully works through the calculations in both narrative and mathematical computations.
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