FINANCE Corporate financial policy and R and D Management

The optimal portfolio to minimize risk is composed of

Stock Asset Weight

JNJ 1 .5068

IBM 2 .1713

DD 3 .3219

The expected return of the equally weighted three-asset portfolio is 6.720
percent:

E(Rp) = .333 (.0852 + .0768 + .0396)

= .333 (.2016) = .0672

The standard deviation of the equally weighted three-asset portfolio is:

The equally weighted monthly three-asset standard deviation is 5.92 per-
cent, which is a 20.51 percent annualized standard deviation. The opti-
mally weighted, risk-minimizing three-asset portfolio expected return is
6.92 percent (annualized).

E(Rp) = (.5068)(.0852) + (.1713)(.0768) + (.3219)(.0396)

= .0432 + .0132 + .0128 = .0692

The standard deviation of the three-asset, risk-minimizing portfolio is:

σ

σ

σ

σ

p

p

p

p

2 222222

2

2

5068 0710 1713 1107 3219 0811

2 5068 1713 0184 0710 1107

2 5068 3219 1646 0710 0811

2 1713 3219 2988 1107 0811

0013 0004 0007 0000 0003 0003

0030

0548

=++

+

+

+

=+++++

=

=

(. ) (. ) (. ) (. ) (. ) (. )

(. )(. )(. )(. )(. )

(. )(. )(. )(. )(. )

(. )(. )(. )(. )(. )

......

.

.

σ

σ

σ

p

p

p

2 222222

2

333 0710 333 1107 333 0811

2 333 333 0184 0710 1107

2 333 333 1646 0710 0811

2 333 333 2988 1107 0811

0006 0014 0007 0000 0002 0006 0035

0592

=++

+

+

+

=+++++=

=

(. ) (. ) (. ) (. ) (. ) (. )

(. )(. )(. )(. )(. )

(. )(. )(. )(. )(. )

(. )(. )(. )(. )(. )

.......

.

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