CP

(National Geographic (Little) Kids) #1
116 CHAPTER 3 Risk and Return

FIGURE 3-5 Rate of Return Distributions for Two Perfectly Negatively Correlated
Stocks ( 1.0) and for Portfolio WM

r (%) W
_

a. Rates of Return
Stock W

2002

25

0

–10

15

r (%)M
_ Stock M

2002

25

0

–10

15

r (%)p
_ Portfolio WM

2002

25

0

–10

15

0 15 Percent
r W

Probability
Density

Stock W

b. Probability Distributions of Returns

0 15 Percent

Probability
Density

Stock M

0 15 Percent

Probability
Density

Portfolio WM

ˆ r ˆM r ˆP

Stock W Stock M Portfolio WM
Year (w)(M)(p)
1998 40.0% (10.0)% 15.0%
1999 (10.0) 40.0 15.0
2000 35.0 (5.0) 15.0
2001 (5.0) 35.0 15.0
2002 15.0 15.0 15.0
Average return 15.0% 15.0% 15.0%
Standard deviation 22.6% 22.6% 0.0%

r r r

114 Risk and Return
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