For this question, assume you have the following prices, expected returns, and shares outstanding (not up-to-date): 

• George Weston (WN) listed on the TSX
  • Price = $155.
  • Shares Outstanding = 146.1M 
  • Expected return = 9%.
  • Standard deviation of returns = 25%.

 

• TD Bank (TD) listed on the TSX
  • Price = $83.
  • Shares Outstanding = 1.8B.
  • Expected return = 7%.
  • Standard deviation of returns = 15%.

 

• Savaria Corporation (SIS) listed on the TSX
  • Price = $13.62.
  • Shares Outstanding = 64.3M.
  • Expected return = 15%.
  • Standard deviation of returns = 42%.

 

You also have the following correlation coefficients:

 (correlation coefficient between George Weston and TD)

 (correlation coefficient between Savaria and TD)

 (correlation coefficient between George Weston and Savaria)

 

Part A (2 Marks): What is the expected return on an equally weighted portfolio of these three stocks?

 

Part B (5 Marks): What is the expected return on a market capitalization (value) weighted portfolio of these three stocks?

 

Part C (4 Marks): What is the standard deviation on an equally weighted portfolio of these three stocks? Hint: there will be three covariance (correlation) terms in this variance formula.

 

Part D (3 Marks): Discuss the concept of diversification. Try to incorporate your answers to Parts A and C in your discussion.

Answer rating: 100% (QA)

Part A Expected Return on an Equally Weighted Portfolio To calculate the expected return on an equally weighted portfolio of three stocks well take the average of the expected returns of each stock Th... View the full answer