Here are some historical data on the risk characteristics of Dell and McDonald's:
Beta - Dell 1.33 / McDonald's 0.84
Yearly standard deviation of return(%) Dell 33.40 / McDonald's 15.2
Assume the standard deviation of the return on the market is 11%.
a.) The correlation coefficient of Dell's return versus McDonald's is 0.33. What is the standard deviation of a protfolio invested half in Dell and half in McDonald's?
b.) What is the standard deviation of a portfolio invested one-third in Dell, one-third in McDonald's, and one-third in risk-free Treasury bills?
c) What is the standard deviation if the portfolio is split evenly between Dell and McDonald's and is financed at 50% margin, that is, the investor puts up only 50% of the total amount and borrows the balance from the broker?
d.) What is the approximate standard deviation of a portfolio composed of 100 stocks with betas of 1.33 like Dell? How about 100 stocks like McDonald's?