The covariance of returns on stocks X and Y is 0002700 Consi

The covariance of returns on stocks X and Y is 0.002700. Consider a portfolio of 70% stock X and 30% stock Y.

What is the standard deviation of portfolio returns?

Please specify your answer in decimal terms and round your answer to the nearest thousandth (e.g., enter 12.3 percent as 0.123).

Solution

Standard deviation of potfolio [(weight1)² * variance1 + (Weight2)² * varainace2 + 2 * weight1 * weight2 * covariace]^1/2

Standard deviation of potfolio = (0.7² * 0.007 + 0.3² * 0.003 + 2 * 0.7 * 0.3 * 0.0027)^1/2

Standard deviation of potfolio = ( 0.00343 + 0.00027 + 0.001134)^1/2

Standard deviation of potfolio = ( 0.004834)^1/2

Standard deviation of potfolio = 0.069527 or 0.07