CP

Risk in a Portfolio Context 119

FIGURE 3-7 Rate of Return Distributions for Two Partially Correlated

Stocks (    
0.67) and for Portfolio WY

Stock W Stock Y Portfolio WY

Year (w)(Y)(p)

1998 40.0% 28.0% 34.0%

1999 (10.0) 20.0 5.0

2000 35.0 41.0 38.0

2001 (5.0) (17.0) (11.0)

2002 15.0 3.0 9.0

Average return 15.0% 15.0% 15.0%

Standard deviation 22.6% 22.6% 20.6%

r r r

r (%)W

_

a. Rates of Return
Stock W

2002

25

0

–15

15

r (%)Y

_ Stock Y

2002

25

0

–15

15

r (%)p

_

Portfolio WY

2002

25

0

–15

15

b. Probability Distribution of Returns

0 15 Percent

Probability

Density

rˆp

Portfolio WY

Stocks W and Y

p

Risk and Return 117