Standard deviation of the portfolio
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Security F has an expected return of 12% and a standard deviation of 9% per year. Security G has an expected return of 18% and a standard deviation of 25% per year. A portfolio is composed of 30% of Security F and 70% of Security G? If the correlation coefficient between the returns of F and G is 0.2, what is the standard deviation of the portfolio?
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This posting provides a detailed and complete solution to the student's problem of calculating the standard deviation for a portfolio of two securities given their respective expected returns and standard deviations.
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The variance of the portfolio equals:
s2P = (WF)2(sF)2 + (WG)2(sG)2 + (2)(WF)(WG)(sF)(sG)[Correlation(RF, RG)]
where s2P = the variance of the portfolio
WF = the weight of Security F in the ...
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