You are considering investing in an emerging market. Its stock market volatility (standard deviation of returns measured in USD) is 15%. The volatility of the world index of developed markets is 10%. The correlation between the emerging market and the world index is 0.1.

i) Calculate the standard deviation of a portfolio invested 70% in the world index and 30% in this emerging market. Provide your workings and full calculations, when answering this question. [5 marks]

ii) Compare your answer in (i) with the volatility of the world index and explain the difference without doing any other calculations.

Answer rating: 100% (QA)

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