Compare the average annual returns and standard deviations of annual returns of Coca-Cola (ticker: KO), FedEx Corp (FDX), and Motorola, Inc. (U:MOT) to those of a portfolio containing the three companies' stocks.
Calculate the average and standard deviation of annual returns for each company. Now assume that you form a portfolio by investing equal amounts of money in each stock.
Determine the annual returns for this portfolio. To calculate the portfolio's return in each year, simply calculate a weighted-average of the returns of the stocks in the portfolio. The weight given to each stock is one-third.
For example, if the returns on KO, FDX, and MOT are 10%, -3%, and 20% in a certain year, then the portfolio return for that year equals:
(1/3)(10%) + (1/3)(-3%) + (1/3)(20%) = 9%
After calculating the portfolio's return in each year, then calculate the average and standard deviation of the portfolio's annual returns.
How do these compare to the average and standard deviation of annual returns of the three firms taken separately?
What can you infer about the risk and return of the portfolio compared to those of the individual firms?
Does your answer change if you invest 40 percent of your capital in Motorola, 35 percent in Coca-Cola, and the remaining funds in FedEx?