CMA Final · Strategic Financial Management · Portfolio Theory and Practice
Mehta invests 60% in Stock X and 40% in Stock Y. SD of X is 10% and SD of Y is 20%. The correlation between X and Y is 0.25. What is the portfolio standard deviation (approximately)?
The portfolio standard deviation is about 11.14%. Variance is 36 + 64 + 24 = 124 in percent-squared terms, and its square root is 11.14%. None of the listed values matches this, so the question is flawed.
- A12.00%
- B11.66%
- C13.27%Correct
- D10.40%
Explanation
Variance = (0.6^2 x 100) + (0.4^2 x 400) + 2 x 0.6 x 0.4 x 0.25 x 10 x 20 = 36 + 64 + 24 = 124. SD = sqrt(124) = 11.14%. Check: 0.36x100=36, 0.16x400=64, 2x0.24x0.25x200=24, total 124, so SD is 11.14%.
Did you get it right without looking?
One question tells you little. A timed set on Portfolio Theory and Practice shows your real accuracy, how long you take and where you lose marks.
More Portfolio Theory and Practice questions
- Security P has a standard deviation of 20% and Security Q has a standard deviation of 10%. The correlation between them is -1. What proporti…
- Two securities A and B have standard deviations of 10% and 20% respectively, and the covariance between their returns is 0.01 (that is, 100 …
- A portfolio has 60% invested in a stock with beta 1.2 and 40% in a stock with beta 0.8. What is the portfolio beta?
- The risk-free rate is 6%, the expected return on the market portfolio is 14% and its standard deviation is 15%. Meera has ₹10 lakh of her ow…
- Two assets A and B have standard deviations of 10% and 20% respectively. A portfolio holds 50% in each and the correlation coefficient betwe…
- Two assets A and B have standard deviations of 20% and 30% respectively. Their correlation coefficient is 0.5. What is the covariance betwee…