Question

1. Suppose Johnson & Johnson and Walgreens Boots Alliance have expected returns and volatilities shown below, with a correlation of 21%.

   	Expected Return	Standard Deviation
   Johnson & Johnson	6.90%	17.90%
   Walgreens Boots Alliance	9.60%	21.60%

   
   
   
   
   
   
   

1. Calculate the expected return and the volatility of a portfolio that is equally invested in both stocks.
2. For the portfolio in (a), if the correlation between two stocks were to increase, would the expected return of the portfolio rise or fall? Would the volatility of the portfolio rise or fall?
3. Calculate the expected return and the volatility of a portfolio that consists of a long position of $8500 in Johnson & Johnson and a short position of $1500 in Walgreens’.

Answer 1

Sohution Assels TWo ast Wagoeons Bools Allence A=Johnson Tohnson Valzue o Tohnson & TohnsonCVA) S508 vdzee q wdreen Roolk Allianca (B) 1500 Weight o Johnson Johnson WA = weraht o Welgrean Boo Allfma, w-0.21425=C-WA) 1. 외4265 - Expected sted. Deulichion Loerqkls portfolio Pth And Retusn E) SD) A 121-4225 1. 60f 9607 21. 4285T Sum werguts Corvelatton (=T) 6.2 Cov (A,B) TX SDAK SDB Expected Retum ot þesttolio (Exp) Vantance obet folio (Vp) tandard deuichonpert folio(sp /303. 0 045153 21.24 Calaulthons COVCA, B SA S DA X SDB 0-21x 13.90. x 21-607. = 0.00gli794 SPPVP Exp WAXET(A)wBx ErB) 428 56.10.+ -2042 60 8.38S 5°8085. AX SDAWg x-SDR cOU (A,B)XWAxWg o4944x0 03204 + 0.0459 1e xo:046b5 +QY(6-005]) x 1. 21485Y(-O.2142 0.04513