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Question:

A portfolio is invested 30% in Asset A with the remainder invested in Asset B. Asset A has an expected return of 6% and variance of returns of 0.031, while Asset B has an expected return of 7% and variance of returns of 0.045. The covariance between the returns of the two assets is 0.03735. The standard deviation of returns for the portfolio is closest to:

A
20%.

Explaination

The correlation between the returns of the two assets is: $9885_w248_h42.png$

Therefore, the standard deviation of the portfolio returns is a weighted average of the standard deviations of returns for the two assets: $4893_w259_h19.png$ .

Since the correlation of returns is +1, there are no diversification benefits.

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