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How do you calculate risk on a two-asset portfolio?

In: Business & Finance, Investing and Financial Markets, Statistics [Edit categories]

Answer:

For a two-asset portfolio, the risk of the portfolio, σ_{p, is:}

2222p1122112212222p11221212121212σ=wσ+wσ+2wσwσρorσ=wσ+wσ+2wwcovcov since ρ=σσ

where σi is the standard deviation of asset i's returns,

ρ12 is the correlation between the returns of asset 1 and 2, and

_{cov12 is the covariance between the returns of asset 1 and 2.} Problem

What is the portfolio standard deviation for a two-asset portfolio comprised of the following two assets if the correlation of their returns is 0.5? Asset A

Asset B

Expected return

10%

20%

Standard deviation of expected returns

20%

Amount invested

$40,000

$60,000

First answer by ID3573983596. Last edit by ID3573983596. Question popularity: 1 [recommend question].

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