Problem 1: Consider two securities, A and B, with standard deviations of 30% and 40%, respectively. Calculate the standard deviation of a portfolio weighted equally between the two securities if their correlation is:
1. 0.9
2. 0.0
3. -0.9
Problem 2: Jean Smith owns a portfolio composed of three securities with the following characteristics:
|
Security
|
Beta
|
Standard Deviation Random Error Term
|
Proportion
|
|
A
|
1.20
|
5%
|
0.30
|
|
B
|
1.05
|
8%
|
0.50
|
|
C
|
0.90
|
2%
|
0.20
|
If the standard deviation of the market index is 18%, what is the total risk of Jean’s portfolio?