nvest equally in 2 mutual funds. ABC stock index and XYZ long-term g.pdf

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The document discusses equally investing in two mutual funds - an ABC stock index fund and XYZ long-term government bond index fund. It provides the monthly historical returns and standard deviations for each fund over the past 20 years. It then presents an equation to calculate the standard deviation of the portfolio given the weights, individual standard deviations, and correlation of the two funds. When the values from the table are plugged into the equation, the standard deviation of the portfolio is 11.83%.

Formation

nvest equally in 2 mutual funds. ABC stock index and XYZ long-term goverment bond index
fund. Table provides monthly historical returns for the past 20 years.
What is the standard deviation of this portfolio?
A. 16.74%
B. 11.83%
C. 14.59%
D. 19.47%
E.12.38%ABC StockXYZ BondReturn15.25%7.5%Std. Dev21.5%5.85%Correlation0.25
Solution
Portfolio Standard Deviation=Underroot(A2A2+B2B2+2AABB)
Where,
A = weight of asset A in the portfolio;
B = weight of asset B in the portfolio;
A = standard deviation of asset A;
B = standard deviation of asset B; and
= correlation coefficient between returns on asset A and asset B.
Portfolio Standard
Deviation=(((0.5^2)*(0.215^2))+((0.5^2)*(0.0585^2))+(2*0.5*0.5*0.215*0.0585*0.25))^(1/2)
= 11.83%

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nvest equally in 2 mutual funds. ABC stock index and XYZ long-term g.pdf

1. nvest equally in 2 mutual funds. ABC stock index and XYZ long-term goverment bond index fund. Table provides monthly historical returns for the past 20 years. What is the standard deviation of this portfolio? A. 16.74% B. 11.83% C. 14.59% D. 19.47% E.12.38%ABC StockXYZ BondReturn15.25%7.5%Std. Dev21.5%5.85%Correlation0.25 Solution Portfolio Standard Deviation=Underroot(A2A2+B2B2+2AABB) Where, A = weight of asset A in the portfolio; B = weight of asset B in the portfolio; A = standard deviation of asset A; B = standard deviation of asset B; and = correlation coefficient between returns on asset A and asset B. Portfolio Standard Deviation=(((0.5^2)*(0.215^2))+((0.5^2)*(0.0585^2))+(2*0.5*0.5*0.215*0.0585*0.25))^(1/2) = 11.83%

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