Question

Assume there is a fixed exchange rate between the Canadian and U.S. dollar. The expected return and standard deviation of return on the U.S. stock market are 18% and 15%, respectively. The expected return and standard deviation on the Canadian stock market are 13% and 20%, respectively. The covariance of returns between the U.S. and Canadian stock markets is 1.5%.If you invested 50% of your money in the Canadianstock market and 50% in the U.S. stock market, the standard deviation of return of your portfolio would be
A.12.53%.
B. 15.21%.
C. 17.50%.
D. 18.75%.

Answer 1

Answer:

standard deviation = 15.21%

so correct option is B. 15.21%

Explanation:

given data

expected return US = 18%

standard deviation of return US = 15%

expected return canadian = 13%

standard deviation of return canadian = 20%

covariance of returns = 1.5 %

to find out

standard deviation of return

solution

standard deviation is find here as given formula that is

standard deviation = $\sqrt{w1^2*\sigma_1^2 + w2^2*\sigma_2^2 + 2*w1*w2*convariance}$     ................1

here w1 is amount invested in US stock and w2 is investment in canada and σ1 is Standard deviation return of US and σ2 is Standard deviation return of canada

put here value in equation 1 we get

standard deviation = $\sqrt{0.50^2* 0.15^2 + 0.50^2* 0.20^2 + 2*0.50*0.50*0.015}$

solve it we get

standard deviation =  0.1520690

standard deviation = 15.21%

so correct option is B. 15.21%