To calculate the standard deviation of the portfolio, use both the individual stocks risk as well as the correlation between them in the following formula for portfolio variance: (0.702 × 0.222) + (0.302 × 0.322) + (2 × 0.70 × 0.30 × 0.22 × 0.32 × 0.6) = 0.0237 + 0.0092 + 0.0177 = 0.0507. We then take the square root of 0.0507 to obtain the standard deviation of 22.5%. Notice that this is much less than the standard deviation of 32% on the Korean asset |
