FINANCE Corporate financial policy and R and D Management

Let us now examine a three-asset portfolio construction process using
Johnson & Johnson, DuPont, and IBM securities.

Stock Asset

JNJ 1

IBM 2

DD 3

(8.4)

(8.5)

∂σ

∂

σσσσσσσσσ

p

x

xx

2

2

22

2

3

2

23 1 3

2

12 13 23 3

2

=+−++−−−+= 2 ()( 2 22 2 2 22 0) 23

∂σ

∂

σσσσσσσσσ

p

x

xx

2

1

11

2

3

2

13 2 3

2

12 13 23 3

2

=+−++−−−+= 2 ()( 2 22 2 2 22 0) 13

σσσσσσσ

σσσσσ

σ

p xx xxx xx xx

xx xx xx xxx

xxx

x

2

1

2

1

2

2

2

2

2

3

2

3

2

1 2 12 1 3 23 2 3 23

1

2

1

2

2

2

2

2

12

2

3

2

1 2 12 1 1 2 13

21223

222

1221

21

=+++++

=++−−++−−

+−−

=

() ()

()

11

2

1

2

2

2

2

2

12 123

2

1 2 12 1 13

1

2

13 1 2 13 2 23 1 2 23 2

2

23

1

2

1

2

2

2

2

2

1212

11 22

22 22 2

12 2 2

σσσσσ

σσσσσ

σσ

++−−−−++

−−+−−

=++−−++

xxxxxxxx

xxxxxxx

xx xxxx

()()

(

xxx xx x

xxxxxxx

1

2

2

2

3

2

1 2 12 1 13

1

2

13 1 2 13 2 23 1 2 23 2

2

23

22

22 22 2

+++

−−+−−

)σσσ

σσσσσ

ER xER xER xER

xxx

ER xER xER x x ER

p

p

() () () ()

() () ()( )()

=++

=−−

=++−−

11 2 2 3 3

312

11 2 2 12 3

1

1

let

σσpxxijij

j

N

i

N

2

1 1

=

= =

∑∑

ERpiixER

i

N

()= ()

=

∑

1

206 THE USE OF FINANCIAL INFORMATION IN THE RISK AND RETURN OF EQUITY