Suppose that Treasury bills offer a return of about 6% and the expected market risk premium is 8.5%. The standard deviation of Treasury-bill returns is zero and the standard

◗ TABLE 7.9 Standard deviations of returns and correlation coefficients for a sample of eight stocks.

Note: Correlations and standard deviations are calculated using returns in each country’s own currency; in other words, they assume that the investor is protected against exchange risk.

Correlation Coefficients BP Canadian Pacific Deutsche Bank Fiat Heineken LVMH Nestlé

Tata Motors Standard Deviation BP 1 0.19 0.23 0.20 0.34 0.30 0.16 0.09 22.2%

Canadian Pacific 1 0.43 0.31 0.39 0.34 0.17 0.40 23.9 Deutsche Bank 1 0.74 0.73 0.73 0.49 0.68 29.2 Fiat 1 0.66 0.64 0.47 0.53 35.7 Heineken 1 0.64 0.51 0.50 18.9 LVMH 1 0.52 0.60 20.8 Nestlé 1 0.43 15.4 Tata Motors 1 43.0 Visit us at www.mhhe.com/bma 184 Part Two Risk deviation of market returns is 20%. Use the formula for portfolio risk to calculate the standard deviation of portfolios with different proportions in Treasury bills and the market.

( Note: The covariance of two rates of return must be zero when the standard deviation of one return is zero.) Graph the expected returns and standard deviations.

AppendixLO1