Asset Allocation. William Kinlaw

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upper A Baseline 2"/> equals the relative volatility between A1 and A2, equals the standard deviation of A1, equals the standard deviation of A2, and is the correlation between A1 and A2. The same equation is used to calculate the relative volatility between securities B1 and B2.

      We measure the importance of choosing between asset class A and asset class B the same way, but first we must calculate the standard deviation of each asset class. If we assume the individual securities are weighted equally within each asset class, the standard deviation of asset class A equals

(3.3)

      Here, equals the standard deviation of asset class A, equals the standard deviation of A1, equals the standard deviation of A2, and is the correlation between A1 and A2.

      We repeat the same calculation to derive the standard deviation of asset class B.

      The relative volatility between asset class A and asset class B equals

      (3.4)

TABLE 3.1 Standard Deviation, Correlation, and Relative Volatility

	Standard Deviation (%)	Correlation (%)	Relative Volatility (%)			Standard Deviation (%)	Correlation (%)	Relative Volatility (%)
A1	10.0				A1	10.0
A2	10.0	0.0	14.1		A2	10.0	50.0	10.0
B1	10.0				B1	10.0
B2	10.0	0.0	14.1		B2	10.0	50.0	10.0
A	7.1				A	8.7
B	7.1	0.0	10.0		B	8.7	50.0	8.7
	Standard Deviation (%)	Correlation (%)	Relative Volatility (%)			Standard Deviation (%)	Correlation (%)	Relative Volatility (%)
A1	10.0				A1	10.0
A2	10.0	50.0	10.0		A2	10.0	50.0	10.0
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