Business, 29.10.2020 17:10 TheRunningPotatoe245

Consider a portfolio with 80% invested in asset X and 20% invested in asset Y . The volatility of each asset is the same and equals to 0.2. The correlation coefficient between the two asset returns is 50%. What is the portfolio volatility

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Answer from: kevintino

The portfolio volatility is 26.83%.

Explanation:

The portfolio volatility refers to the standard deviation of the rate of return of an investment portfolio.

To calculate the standard deviation, the variance of the of the return on the portfolio is first calculated using the following formula:

Portfolio return variance = (WX^2 * SDX^2) + (WY^2 * SDY^2) + (2 * WX * SDX * WY * SDY * CFxy) ......................... (1)

Where;

WX = Weight of Stock X = 80%

WY = Weight of Stock Y = 20%

SDX = Standard deviation of stock X return = 0.2

SDY = Standard deviation of stock Y return = 0.2

CFxy = The correlation between stock X and stock Y = 50%

Substituting all the values into equation (1), we have:

Portfolio return variance = (80%^2 * 0.2^2) + (20% * 0.2) + (2 * 80% * 0.2 * 20% * 0.2 * 50%)

Portfolio return variance = 0.072

The standard deviation of the return on this portfolio can be calculated as using the following formula:

$PRSD =\sqrt{PRV}$ ........................... (2)

Where;

PRSD = Portfolio return standard deviation = ?

PRV = Portfolio return variance = 0.072

Substituting the values into equation (2), we have:

$PRSD=\sqrt{0.072}$

PRSD = 0.2683, or 26.83%

Therefore, the portfolio volatility is 26.83%.

Answer from: Quest

cognitive overload: having a lot on your mind impairs decision-making and tends to result in the simplest, but not necessarily best, option being selected.

empathy gaps: overlooking how you might feel in a different situation can result in unnecessary purchases, such as overbuying when shopping for food on an empty stomach.

optimism and overconfidence: wearing rose-tinted glasses and having unrealistic expectations about the future can affect money management and leave you unprepared for a change in circumstance.

instant gratification: seeking instant gratification drives impulsive spending and can undermine long-term planning and savings.

harmful habits: automatic or mindless behaviour can amplify a poor financial decision as it becomes a recurring event.

social norms: we are heavily influenced by the actions of others; while this can be in certain circumstances, it also contributes to the pressure to keep up with the joneses through conspicuous consumption.

Answer from: Quest

the answer is b. the events might happen and are based on crimes.

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Consider a portfolio with 80% invested in asset X and 20% invested in asset Y . The volatility of ea...

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