Portfolio Standard Deviation No unread replies. No replies. Troy wants to form a
ID: 1171150 • Letter: P
Question
Portfolio Standard Deviation No unread replies. No replies. Troy wants to form a portfolio of four different stocks. Summary data on the four stocks appears below. The average standard deviation (found simply by summing the standard deviations and dividing by 4 which is the same as the weighted average in this example) across the four stocks is 17.25%. If Troy forms a portfolio by investing 25% of his money in each of the stocks in the table, it is very likely that the standard deviation of this portfolio’s return will be (more than, less than, equal to) 17.25%. Choose one of the options (more than, less than, equal to) and explain WHY? (You are not asked to calculate portfolio standard deviation or correlation. You do not need to do any math at all to answer this.) Stock Return Standard deviation #1 12% 20% #2 -5% 29% #3 7% 13% #4 2% 7%
Explanation / Answer
Given SDs = 20%, 29%, 13% & 7% respectively
Portfolio SD will be always </= weighted avg SD of securities in that portfolio
If Correlation between them is <1, The Portfolio SD is less than Weighted AVg SD of securities
If r = 1, Portfolio SD is equal to weighted avg SD of securities in that portfolio,
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