uppose Johnson & Johnson and the Walgreen Company have expected returns and volatilities shown below, with a correlation of 22%. Calculate the expected return of a portfolio that is equally invested in J&J and Walgreen’s stock. Calculate the volatility (standard deviation) of a portfolio that is equally invested in Johnson & Johnson’s and Walgreen’s stock.
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Suppose Johnson & Johnson and the Walgreen Company have expected returns and volatilities shown below, with a correlation of 22%.
- Calculate the expected return of a portfolio that is equally invested in J&J and Walgreen’s stock.
- Calculate the volatility (standard deviation) of a portfolio that is equally invested in Johnson & Johnson’s and Walgreen’s stock.
![E[R]
SD[R]
Johnson & Johnson
7%
16%
Walgreen Company
10%
20%](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F8f481a4c-21e8-403a-b639-ebd368d464a7%2F7946dd6f-c15d-4593-8a95-3616089d293b%2Fzmvcccr_processed.jpeg&w=3840&q=75)
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