CP

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