P5.3 Assume you are considering a portfolio containing two assets, L and M. Asset L will rep- resent 40% of the dollar value of the portfolio, and asset M will account for the other 60%. The expected returns over the next 6 years, 2012-2017, for each of these assets are summarized in the following table. Expected Return (%) Year Asset L Asset M 2012 14 20 2013 14 18 2014 16 16 2015 17 14 2016 17 12 2017 19 10

a. Calculate the expected portfolio return, 7p, for each of the six years.

b. Calculate the average expected portfolio return, 7p, over the six-year period.

c. Calculate the standard deviation of expected portfolio returns, sp, over the six-year period.

d. How would you characterize the correlation of returns of the two assets L and M?

c. Discuss any benefits of diversification achieved through creation of the portfolio.