Standard Deviation and risk of a portfolio
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1) Consider two securities, A and B, with standard deviations of 30% and 40%, respectively. Calculate the standard deviation of a portfolio weighted equally between the two securities if their correlation is:
1. 0.9
2. 0.0
3. -0.9
2) Jean Smith owns a portfolio composed of three securities with the following characteristics:
Security Beta Standard Deviation Random Error Term Proportion
A 1.20 5% 0.30
B 1.05 8% 0.50
C 0.90 2% 0.20
If the standard deviation of the market index is 18%, what is the total risk of Jean's portfolio?
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The solution calculates standard deviation and risk of a portfolio.
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