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    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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    Solution Preview

    Please see the attached file.

    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 ...

    Solution Summary

    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.