Suppose Johnson & Johnson and the Walgreen Company have the expected returns and volatilities shown below, with a correlation of
21.2 %21.2%.
Upper E left bracket Upper R right bracketE [R] 
SD left bracket Upper R right bracketSD [R] 

Johnson & Johnson 
7.3 %7.3% 
16.1 %16.1% 
Walgreen Company 
10.8 %10.8% 
19.8 %19.8% 
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).
Given
E(RJ) Expected return for Johnson & Johnson = 7.3%
E(RW) Expected return for Walgreen Company = 10.8%
Standard deviation SDJ = 16.1%
Standard deviation SDW = 19.8%
Weights of each Jonson and Johnson and Walgreen = 50%
a) E(RP) expected return of portfolio = wJ * E(RJ) + wW * E(RW)
E(RP) = 0.50 * 0.073 + 0.50 * 0.108
E(RP) = 9.05%
Expected return of portfolio is 9.05%
b) Standard deviation of portfolio = sqrt ( wJ^{2} * SDJ^{2} + wW^{2} * SDW^{2} +2* wJ * wW * correlation * SDJ * SDW )
Standard deviation = sqrt ( 0.5^{2} * 0.161^{2} + 0.5^{2} * 0.198^{2} + 2* 0.5 * 0.5 * 0.212* 0.161 * 0.198 )
Standard deviation = sqrt ( 0.01966)
Standard deviation = 14.02%
The volatility of SD is 14.02%
Get Answers For Free
Most questions answered within 1 hours.