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Math Help - Determining Standard Deviation of product given SD's of components

  1. #1
    gms
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    Determining Standard Deviation of product given SD's of components

    Hi,

    Imagine two stocks A and B with known standard deviations and the correlation between them.

    Another stock, say, an index C, is composed of 60% of A and 40% of B. What is the standard deviation of this index?

    I have used the following forumla:

    Covariance of A and B = correlation * SD of A * SD of B

    Variance of C = .6 * (variance of A) + .4 * (variance of B) * 2 * .4 * .6 (covariance)

    Then I square root the variance of C for the std dev. Is this right?

    Thanks in advance.
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  2. #2
    gms
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    Fixed my forumla. Should have been squaring the ratios as well:

    Variance of C = .6^2 * (variance of A) + .4^2 * (variance of B) * 2 * .4 * .6 (covariance)

    Well explained here: Portfolios of Two Assets
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