1. (A) Both Starcents and Jpod have the same return standard deviation of 20 per

Question

1. (A) Both Starcents and Jpod have the same return standard deviation of 20 percent, and Starcents and Jpod returns have a correlation of 1. You invest half your funds in Starcents and the other half in Jpod. What is the return standard deviation for your portfolio?

(B) Both Starcents and Jpod have the same return standard deviation of 20 percent, and Starcents and Jpod returns have a correlation of +1. You invest half your funds in Starcents and the other half in Jpod. What is the return standard deviation for your portfolio?

(C) Both Starcents and Jpod have the same return standard deviation of 20 percent, and Starcents and Jpod returns have zero correlation. You invest half your funds in Starcents and the other half in Jpod. What is the return standard deviation for your portfolio?

Explanation / Answer

Variance of portfolio is given by

^2 = w1^2*1^2 + w2^2*2^2 + 2*w1*w2*1*2*

And standard deviation for given correlation in question

When = -1, = |w1*1 – w2*2 |

= |0.5*0.20 – 0.5*0.20| = 0

When = +1, = w1*1 + w2*2

= 0.5*0.20 + 0.5*0.20 = 0.20 = 20%

When = 0, = (w1^2*1^2 + w2^2*2^2)

= (0.5^2*0.2^2 + 0.5^2*0.2^2)

= 0.5*0.22 = 0.102 = 0.1414 = 14.14%

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