P5.3 Assume you are considering a portfolio containing two assets, L and M. Asset L will represent 40% of the dollar value of the portfolio, and asset M will account for the other 60%. The expected returns over the next six years, 2012–2017, for each of these assets are summarised in the following table.

2LG 1LG 1LG

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

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

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

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

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