Standard deviation of a portfolio

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lylcheng88

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Hey guys, I know this is a pretty basic concept but Question #4 in the Schweser self-test is quite confusing.
I thought the standard deviation of a portfolio needs to be calculated as the sq rt of W1^2*Std Dev1 + W2^2*Std Dev2 + 2*W1*W2*Cov(1,2)
However, why does the answer to this question simply take the weighted average of the two portfolios’ Std dev as the gross portfolio std dev?
 
They’re assuming that the correlation of returns of adjacent corner portfolios is zero.
That’s probably wrong, but that’s the assumption.
 
On another note, that’s the very definition of corner portfolio. 2 corner portfolios are the 2 ends of segmentation (blah!), hence the supposedly have 0 correln. (blah! blah!)
 
Thanks to you both - are corner portfolios supposed to have 0 correlation on a presumptive basis? I find this kind of strange but if the textbook specifies this somewhere please could someone enlighten me to read up more on this?
 
Yes: it’s a simplifying assumption.
In fact, there’s no reason for them to have zero correlation of returns.
 
S2000magician wrote:
Yes: it’s a simplifying assumption.
In fact, there’s no reason for them to have zero correlation of returns.
Click to expand...
Thank you! really appreciate your help!
 
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