Let X and Y be two stocks with the following features:
- Stock X Expected Return 14%
- Stock Y Expected Return 18%
- Stock X Standard Deviation 40%
- Stock Y Standard Deviation 54%
- Correlation(X,Y) = .25
- Mean is 15.6%
What is the standard deviation for a portfolio with 60% in stock x and 40% invested in stock Y?© BrainMass Inc. brainmass.com June 3, 2020, 4:53 pm ad1c9bdddf
The formulas used to compute the answer are the following.
Let X and Y be random variables, and let a and b be numbers. Then,
1) Var(X) = SD(X)^2 (SD is standard deviation)
2) Var(aX+bY)=a^2*Var(X)+b^2*Var(Y)+2*a*b*Cov(X,Y) (Cov is covariance)
3) Correlation(X,Y)= Cov(X,Y)
The solution carefully explains all the concepts, the logic while showing the formulas and the calculations to arrive at the answers.