Question 3

Suppose Johnson & Johnson and the Walgreen Company have expected returns and volatilities shown below, with a correlation of 22%.

	Expected Return	Standard Deviation
Johnson & Johnson	7%	16%
Walgreen Company	10%	20%

a) What is the expected return a portfolio that is equally invested in Johnson & Johnsons and Walgreens stock?

b) What is the volatility (standard deviation) of this portfolio?

If the correlation between Johnson & Johnsons and Walgreens stock were to increase,

c) Would the expected return of the portfolio rise or fall?

d) Would the volatility of the portfolio rise or fall?