So i have this information:
Suppose that 60% of your portfolio is invested in Johnson & Johnson (JNJ) and the remainder is invested in Ford. You expect that over the coming year JNJ will give a return of 8% and Ford, 18.8%.
Then I know that expected return on the portfolio is simply a weighted average of the expected returns on the individual stocks:
Expected portfolio return = (.60 × 8) + (.40 × 18.8) = 12.3%
However, then the book says:
We said earlier that if the two stocks were perfectly correlated, the standard deviation of the portfolio would lie 40% of the way between the standard deviations of the two stocks.
There have been no other calculations on the book and only after this statement should i start the calculations in order to understand the portfolio risk.
Can somebody please tell me where this 40% is coming from ? Thanks!