Can this be calculated on a BA 2 Plus? If so, What are the step to calculate the

Question

Can this be calculated on a BA 2 Plus? If so, What are the step to calculate the anwser?

Volusia, Inc. is a U.S.-based exporting firm that expects to receive payments denominated in both euros and Canadian dollars in one month. Based on today's spot rates, the dollar value of the funds to be received is estimated at $500,000 for the euros and $300,000 for the Canadian dollars. Based on data for the last fifty months, Volusia estimates the standard deviation of monthly percentage changes to be 8 percent for the euro and 3 percent for the Canadian dollar. The correlation coefficient between the euro and the Canadian dollar is 0.30.

   31.   Refer to Exhibit 10-2. What is the portfolio standard deviation?

a.

3.00%.

b.

5.44%.

c.

17.98%.

d.

none of the above

ANS: B

SOLUTION:

a.

3.00%.

b.

5.44%.

c.

17.98%.

d.

none of the above

Explanation / Answer

Answer) The question can be solved as follows:-

The formulae for Portfolio standard deviation is given as

St. dev of portfolio =[ (Weight of funds in euros*St. dev of funds in euros)^2 + (Weight of funds in canadian dollars*St. dev of funds in canadian dollars)^2 +( 2* Weight of funds in euros*St. dev of funds in euros* Weight of funds in canadian dollars*St. dev of funds in canadian dollars*correlation coefficient)]^1/2

Now

Weight of funds in euros is give as = 500,000 / (500,000+300000) = 62.5%

Weight of funds in canadian dollars = 300000/(500000+300000) = 37.5%

Standard deviation of funds in euros = 8%

Standard deviation of funds in canadian dollars = 3%

Correlation coefficient = 0.30

Applying the values in the formulae above

=[ (0.08*0.625)^2 + (0.03*0.375)^2 + (2*0.03*0.08*0.625*0.375*0.30) ]^0.5

= [(0.0025) + (0.000127) + (0.000338) ]^0.5

= (0.002964)^0.5

= 0.054443

Or 5.44%

Unfortunately , there are no shortcuts in BA plus for calculating the porfolio standard deviation, you have to calculate each value.

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