Sample Exam Question #8 Quant 2016 (prudent fund, agressive fund)

[fjc120]

Hi,

Does anyone know why they ignored correlation and/or covariance when calculating the combined volatility of the portfolio?

In order to arrive at the combined volatility, the equation used was square root of (W^2)(S^2)+ (W^2)(S^2)

Shouldn't we also have included 2*pWSWS in order to arrive at porfolio variance of two funds (although info is not given)?

 

[ShaktiRathore]

Hi,
combined volatility of portfolio=square root of (W^2)(S^2)+ (W^2)(S^2)+2*pWSWS
when correlation and/or covariance = 0,p=0=correlation therefore,
combined volatility of portfolio=square root of (W^2)(S^2)+ (W^2)(S^2)+2*(0)WSWS
combined volatility of portfolio=square root of (W^2)(S^2)+ (W^2)(S^2)+0
combined volatility of portfolio=square root of (W^2)(S^2)+ (W^2)(S^2)
The combined volatility of portfolio is (W^2)(S^2)+ (W^2)(S^2) when the correlation and/or covariance is 0,I think question would have assumed the 0 correlation and/or covariance thats why the combined volatility of portfolio is (W^2)(S^2)+ (W^2)(S^2) .
Thanks