Standard Deviation of Combined Portfolio

Very Hard Portfolio Risk And Return Risk Measures

In the context of evaluating the performance of two portfolios, Portfolio A and Portfolio B, consider the following data:

- Portfolio A has an expected return of 10% with a standard deviation of returns of 15%.

- Portfolio B has an expected return of 12% with a standard deviation of returns of 20%.

Furthermore, the correlation coefficient between the two portfolios is 0.2. Using this information, which of the following statements about the risk (as measured by standard deviation) of a combined portfolio that equally weights Portfolio A and Portfolio B is true?

The standard deviation of the combined portfolio will be less than 17.5%.

The standard deviation of the combined portfolio will be exactly 17.5%.

The standard deviation of the combined portfolio will be more than 17.5%.

Hint

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