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.