How could the S&P Composite Index have a standard deviation of 20.3% if the historical standard deviation of common stocks has been 20.5% and the small company stocks have been 33.3%. I do not quite understand this, can you explain this?© BrainMass Inc. brainmass.com March 4, 2021, 6:20 pm ad1c9bdddf
Because the formula of Variance is
Vp = W1^2 * V1 + W2^2 * V2 + 2W1*W2*Cov(1,2)
If Cov(1,2) < SQRT(V1*v2),
W1^2 * V1 + W2^2 * ...
With the formulas and calculations, the solution solves the answer to the problem.