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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Portfolio Construction Process

A portfolio has 40% in Asset A (expected return 10%) and 60% in Asset B (expected return 15%). The correlation between them is zero. Standard deviations are 10% for A and 20% for B. What is the portfolio standard deviation?

With zero correlation, portfolio variance equals the sum of squared weighted standard deviations: 16 plus 144 equals 160, so the standard deviation is about 12.6%. This is lower than the weighted average of 16%, showing the diversification benefit.

  1. A13.0%
  2. B12.6%Correct
  3. C14.0%
  4. D16.0%

Explanation

Variance = (0.4x10)^2 + (0.6x20)^2 = 16 + 144 = 160 (in %^2). Standard deviation = sqrt(160) = 12.65%, about 12.6%. A weighted average of 16.0% ignores diversification. 14.0% and 13.0% do not follow from the formula.

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