Answer:
The risk will be reduced by 0.109
Explanation:
Standard deviation for stock A = 49%
Standard deviation for stock B = 49%
Correlation = 0.2
Let's use the standard deviation of portfolio equation:
[tex]= \sqrt{w_A^2 \sigma _A^2 + w_B^2 \sigma _B^2 + 2w_A w_B \sigma _A \sigma _B * C}[/tex]
Where[tex] w_B [/tex] = 100% - 56% = 44%
[tex]= \sqrt{(0.56^2 * 0.49^2) + (0.44^2 * 0.49^2) + (2*0.56*0.44*0.49*0.49)0.2}[/tex]
= 0.381 = 38.1%
The risk will be reduced by:
(0.56*0.49)+(0.44*0.49)-0.381
= 0.109
