Stock X has a standard deviation of 25 percent per year and stock Y has a standard deviation of 16 percent per year. The correlation between stock X and stock Y is zero. You have a portfolio of these two stocks wherein stock X has a portfolio weight of 50 percent. What is your portfolio standard deviation?

14.82%

Explanation:

The standard deviation of a portfolio is the

standard deviation of stock X = 25%

standard deviation of stock Y = 16%

weight of X = 50%

weight of Y = 50%

correlation coefficient = 0

therefore portfolio standard deviation

=    -- equation 1

Wx = weight of stock x

Wy = weight of stock y

Sdx = standard deviation of stock x

Sdy = standard deviation of stock y

R = correlation coefficient

back to equation 1

=

therefore standard deviation of new portfolio = 0.1482 = 14.82%

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