Answer:
D. 12.20%
Explanation:
Stock X Weight = 0.60
Stock Y Weight = 0.40
sdX = 10%
sdY = 20%
Portfolio Variance = w2X*sd2(X) + w2X*sd2(Y) + 2*(wX)*(wY)*Cov(X, Y)
Where: wX and wY are portfolio weights, sd2(X) and sd2(Y) are variances and
Cov(X, Y) is the covariance
Correlation = 0.5
Cov(X, Y) = Correlation * sd(X) * sd(Y)
= 0.50 * 0.10 * 0.20
= 0.01
Portfolio Variance = 0.60^2 * 0.10^2 + 0.40^2 * 0.20^2 + 2 * 0.60 * 0.40 * 0.01
Portfolio Variance = 0.0036 + 0.0064 + 0.0048
Portfolio Variance = 0.0148
sd(P) = √Variance = 0.121655 = 12.20%
The correct option is D.
The standard deviation of the portfolio is 12.20%.
SD of Portfolio = Sqrt of (Wx^2 × SDx^2 + Wy^2 × SDy^2 + 2 × Wx × Wy ×SDx × SDy × correlation)
= Sqrt of (0.60^2 × 0.10^2 + 0.40^2 × 0.20^2 + 2 × 0.60 × 0.40 × 0.10 × 0.20 × 0.50)
= Sqrt of (0.0036 + 0.0064 + 0.0048)
= Sqrt of (0.0148)
= 12.2%
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