Question
8. Suppose Johnson & Johnson and the Walgreen Company have expected returns and volatilities shown below, with a correlation of 22%. E[R] SD[R] Johnson&Johnson 7%
8. Suppose Johnson & Johnson and the Walgreen Company have expected returns and volatilities shown below, with a correlation of 22%.
E[R] SD[R]
Johnson&Johnson 7% 16%
Walgreen Company 10% 20%
(a) Calculate the expected return and the volatility (standard deviation) of a portfolio that is equally invested in Johnson & Johnsons and Walgreens stock. (b) For the portfolio in (a), if the correlation between Johnson & Johnsons and Walgreens stock were to increase, would the volatility of the portfolio rise or fall? (c) Calculate the expected return and the volatility (standard deviation) of a portfolio that consists of a long position of $10,000 in Johnson & Johnson and a short position of $2000 in Walgreens.
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