FRM Part I · FRM Exam Part I · Modern Portfolio Theory (MPT) and the Capital Asset Pricing Model (CAPM)
Asset A has a standard deviation of 12% and Asset B has a standard deviation of 20%. Their correlation is 0.30. A portfolio holds 60% in A and 40% in B. What is the portfolio standard deviation, to the nearest 0.1%?
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- A12.4%Correct
- B14.4%
- C16.0%
- D11.2%
Explanation
Variance = (0.6)^2(0.12)^2 + (0.4)^2(0.20)^2 + 2(0.6)(0.4)(0.30)(0.12)(0.20) = 0.005184 + 0.0064 + 0.003456 = 0.01504. Square root = 12.26%, which is about 12.3%. Checking: sqrt(0.01504)=0.12263. So nearest 0.1% is 12.3%, and 12.4% is not exact.
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