What is the standard deviation of a stock and bond portfolio?
16.A portfolio contains $ 30,000 in bonds and $ 70,000 in stocks. The expected return on bonds is 6% with standard deviation of 1%. The expected return on the stocks is 14% with standard deviation of 9%. Assuming that the bonds and stocks are uncorrelated, determine the standard deviation of the above bond and stock portfolio.
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Answer by mrlie3
This is actually very easy question!
Correlation of bond and stock = 0 as it was given, so this means;
Covariance of bond and stock = 0
Therefore,
Sp^2 = Wb^2(Sb^2) + Ws^2(Ss^2) + 2WbWsCOVbs
Sp^2 = 0.3^2(0.01^2) + 0.7^2(0.09)^2 + 0
Sp^2 = 0.003978
Sp = 0.0631 = 6.31%
So the standard deviation of the portfolio is approximately 6.31%.
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