You consider investing in an emerging market. Its stock market volatility (standard deviation of returns measured in U.S. dollars) is 25%. The volatility of the World index of developed markets is 15%. The correlation between the emerging market and the World index is 0.2.
a. What would be the volatility of a portfolio invested 95% in the World index and 5% in this emerging market?
b. Compare the result found in the previous question with the volatility of the World index and give an intuitive explanation.