Interview question

[holbond]

You have an equally weighted portfolio composed of 2 managers; one has 20% volatility, the other 30%. They have a 40% correlation. What is the volatility of the portfolio, using standard assumptions? Give one reason why these standard assumptions can be discussed.

Can u please tell me what are the standard assumptions made in calculating the volatility. I thought it is a simple math problem.

 

[aaronhotchner]

The only real assumption here is that the portfolio returns are normally distributed.

The volatility is sqrt(.5^2 * .2^2 + .5^2 * .3^2 + 2 * .5^2 * .4 * .2 * .3) = 21.1%.

The formula for variance of a two asset portfolio is w1^2 * var1 + w2^2 * var2 + 2 * w1 * w2 * cov(1,2).

 

[holbond]

oh.. thank u