Question

Suppose Johnson? & Johnson and the Walgreen Company have the expected returns and volatilities shown? below, with a correlation of 22.9 %

                                              E(R)        SD(R)

Johnson & Johnson              6.5%         16.4%

walgreen company               9.3%          19.4%

For a portfolio that is equally invested in Johnson? & Johnson's and? Walgreen's stock,? calculate:

a. The expected return of the portfolio?

b. The volatility? (standard deviation)?

Answer 1

	Expected return	Weight	Weight 8 Expected return
Johnson & Johnson	6.50%	50%	3.2500%
Walgreen Company	9.30%	50%	4.6500%
		Total	7.9000%
So expected return is 7.90%
Calculation of standard deviation
The first step is to calculate the covariance:
COVAB = SDA × SDB × rAB, where rAB is the correlation coefficient between securities A and B.
Now, calculate the standard deviation for the portfolio:
[(SDA2 × WA2) + (SDB2 × WB2) + 2 (WA)(WB)(COVAB)]½
Let's calcualte the co-variance	=16.4 * 19.4 * 0.229
	72.85864
Now lets calculate the SD
SD portfolio=	((16.4^2 * 0.50^2)+(19.4^2*0.50^2)+(2*0.5*0.5*72.85))^(0.5)
SD portfolio=	14.06