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