118 CHAPTER 3 Risk and Return
Stock M Stock M Portfolio MM
Year (M)(M )(p)
1998 (10.0%) (10.0%) (10.0%)
1999 40.0 40.0 40.0
2000 (5.0) (5.0) (5.0)
2001 35.0 35.0 35.0
2002 15.0 15.0 15.0
Average return 15.0% 15.0% 15.0%
Standard deviation 22.6% 22.6% 22.6%
r r r
r (%)M
_
a. Rates of Return
Stock M
2002
25
0
–10
15
r (%)
_ Stock M ́
2002
25
0
–10
15
r (%)p
_ Portfolio MM ́
2002
25
0
–10
15
0 15 Percent
Probability
Density
Probability
Density
Probability
Density
b. Probability Distributions of Returns
0 15 Percent 0 15 Percent
M
r ˆM r ˆM ́ r ˆP
FIGURE 3-6 Rate of Return Distributions for Two Perfectly Positively Correlated
Stocks ( 1.0) and for Portfolio MM
116 Risk and Return
