P8–13 Portfolio return and standard deviation Jamie Wong is considering building an investment portfolio containing two stocks, L and M. Stock L will represent 40% of the dollar value of the portfolio, and stock M will account for the other 60%. The expected returns over the next 6 years, 2015–2020, for each of these stocks are shown in the following table.

a. Calculate the expected portfolio return, rp, for each of the 6 years.

b. Calculate the expected value of portfolio returns, rp, over the 6-year period.

c. Calculate the standard deviation of expected portfolio returns, srp, over the 6-year period.

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

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

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Expected return Year Stock L Stock M 2015 14% 20% 2016 14 18 2017 16 16 2018 17 14 2019 17 12 2020 19 10