A has an expected return of 10%

Question

 

If you have 2 assets: A has an expected return of 10% and has a standard deviation of 25%, B has an expected return of 8% and a standard deviation of 25%. For a portfolio with 1/2 weight in each of the 2 assets, what correlation between the assets would make the portfolio standard deviation 25% (the same as each asset indovidually)?

 

Can you provide the equation and walk me through the steps? 

 

Am I calculating the Sharpe ratio? I don't understand what it's asking?

 

Answer 1

Nope, the Share ratio is used to assess the relative preformance of an asset.

Normally, a question is asking you to find the standard deviation of the two assets when they are treated as a single set.  It involves comparing the standard deviation of A and of B and their correlation.

 

This question is asking you to work slightly backwards. Do you know about something called Covariance and the risk of many assets?