Assume that the standard deviation of the U. S. market portfolio is 18.2%, the standard deviation of the world portfolio is 17.1%, and the correlation between the U. S. and nonU. S. market portfolios is. 47. Suppose you invest 25% of your money in the U. S. stock market and the other 75% in the nonU. S. portfolio. What is the standard deviation of your portfolio?

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Business

Patrick Stevens

6 July, 16:23

Assume that the standard deviation of the U. S. market portfolio is 18.2%, the standard deviation of the world portfolio is 17.1%, and the correlation between the U. S. and nonU. S. market portfolios is. 47. Suppose you invest 25% of your money in the U. S. stock market and the other 75% in the nonU. S. portfolio. What is the standard deviation of your portfolio?

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Jamie · Answer 1

15.5%

Explanation:

The computation of the standard deviation of your portfolio is shown below:

Standard deviation of portfolio = weight of US Market portfolio ^2 * Standard deviation of US Market portfolio ^2 + weight of Non US Market portfolio^ 2 * Standard deviation of Non US Market portfolio^2 + 2 * weight of US Market portfolio * weight of Non US Market portfolio * Standard deviation of US Market portfolio * Standard deviation of Non US Market portfolio * correlation

= [0.25^2 * 18.2^2 + 0.75^2 * 17.1^ 2 + 2 * 0.25 * 0.75 * 18.2 * 17.1 * 0.47]

= (0.0625 * 331.24 + 0.5625 * 292.41 + 54.852525

= 20.7025 + 164.480625 + 54.852525

= 240.03565

Now take the square root of 240.03565 i. e 15.5%

We simply applied the above formula