Question

Suppose Johnson & Johnson and the Walgreen Company have the expected returns and volatilities shown below, with a correlation of 21.5% E[R] SD [R] Johnson & Johnson 6.4% 16.9% Walgreen Company 10.4% 19.3% For a portfolio that is equally invested in Johnson & Johnson's and Walgreen's stock, calculate; a. The expected return. b. The volatility (standard deviation). a. The expected return. The expected return of thd portfolio is %. (Round to one decimal place.)

Answer 1

Weight of stock 1, W1 = 0.50 and Weight of stock 2, W2 = 0.50 Correlation, r = 21.5% = 0.215 Expected return of portfolio, E(Rp) = Sum of (Weight * Return) = 0.50 * 6.4% +0.50 * 10.4% = 3.2 % +5.2 % = 8.4 % (Equally weighted portfolio) Standard eviation of portfolio, SDp = Square root of [(W1* SD1)^2 + (W2 * SD2)2+2* W1 * SD1 * W2 * SD2*11 = Square root of 0.50 * 16.9)/2 + (0.50 * 19.372 +2* 0.50 * 16.9* 0.50 * 19.3 * 0.2151 = Square root of [ 71.4025% +93.1225% + 35.063275%] = Square root of [ 199.588275 % ] = 14.12757145 % = 14.13 % (Rounded) Ans: Expected return of portfolio = 8.4% Standard deviation of portfolio, SDp = 14.13 %