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Suppose Johnson​ & Johnson and Walgreen Boots Alliance have expected returns and volatilities shown​ here, check...

Suppose Johnson​ & Johnson and Walgreen Boots Alliance have expected returns and volatilities shown​ here, check the table below, with a correlation of 15%.

Calculate the expected return and the volatility​ (standard deviation) of a portfolio consisting of Johnson​ & Johnson's and​ Walgreens' stocks using a wide range of portfolio weights. Plot the expected portfolio return as a function of the portfolio volatility. Using your​ graph, identify the range of Johnson​ & Johnson's portfolio weights that yield efficient combinations of the two stocks.


                     Expected Return

        Standard Deviation

Johnson​ & Johnson

13​%

16​%

Walgreens Boots Alliance

12​%

11​%


Find the expected return and volatility of the portfolio consisting of 20​% of Johnson​ & Johnson's stock and

80​% of​ Walgreens' stock.

The expected return of the portfolio is ………….​%. (Round to one decimal​ place.)

The volatility​ (standard deviation) of the portfolio is …………​%. (Round to one decimal​ place.)

Find the expected return and volatility of the portfolio consisting of 30​% of Johnson​ & Johnson's stock and 70​% of​ Walgreens' stock.

The expected return of the portfolio is ………….​%. (Round to one decimal​ place.)

The volatility​ (standard deviation) of the portfolio is ………​%. (Round to one decimal​ place.)

Find the expected return and volatility of the portfolio consisting of 40​% of Johnson​ & Johnson's stock and 60​% of​ Walgreens' stock.

The expected return of the portfolio is ……..​%. (Round to one decimal​ place.)

The volatility​ (standard deviation) of the portfolio is ………..​%. (Round to one decimal​ place.)

Plot the expected portfolio return as a function of the portfolio volatility.

Solutions

Expert Solution

Answer (a):

When portfolio consist of 20​% of Johnson​ & Johnson's stock and 80​% of​ Walgreens' stock.

The expected return of the portfolio is 12.2​%.

The volatility​ (standard deviation) of the portfolio is 9.8 %.

Working are given at the end.

Answer (b):

When portfolio consist of 30​% of Johnson​ & Johnson's stock and 70​% of​ Walgreens' stock.

The expected return of the portfolio is 12.3​%.

The volatility​ (standard deviation) of the portfolio is 9.7 %.

Working are given at the end.

Answer (c):

When portfolio consist of 40​% of Johnson​ & Johnson's stock and 60​% of​ Walgreens' stock.

The expected return of the portfolio is 12.4​%.

The volatility​ (standard deviation) of the portfolio is 9.9%.

Working are given at the end.

Answer (d):

Plot of the expected portfolio return as a function of the portfolio volatility

Workings:

Above excel with 'show formula' is as follows:

jeff jeffy answered 1 year ago
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