4. Jamie Wong is thinking of building an investment portfolio containing two stocks, L and M. Stock L will represent 44% of the dollar value of the portfolio, and stock M will account for the other 56%. The historical returns over the last 6 years, 2013-2018, for each of these stocks are shown in the following table 4 a. Calculate the actual portfolio return, Ip, for each of the 6 years. b. Calculate the average return for each stock and for the portfolio over the 6-year period. c. Calculate the standard deviation of returns for each asset and for the portfolio. How does the portfolio standard deviation compare to the standard deviations of the individual assets ? 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 Review Only Click on the icon to see the Worked Solution. a. The average portfolio return for 2013 is The average portfolio return for 2014 is The average portfolio return for 2015 is The average portfolio return for 2016 is The average portfolio retum for 2017 is The average portfolio return for 2018 is b. The average return for Asset Lis The average return for Asset Mis %. (Enter as a percentage and round to one decimal place.) % (Enter as a percentage and round to one decimal place.) % (Enter as a percentage and round to one decimal place.) %. (Enter as a percentage and round to one decimal place.) % (Enter as a percentage and round to one decimal place.) % (Enter as a percentage and round to one decimal place.) %. (Enter as a percentage and round to two decimal places.) %. (Enter as a percentage and round to two decimal places.) The average return for for the portfolio is %. (Enter as a percentage and round to two decimal places.) c. The standard deviation for Asset L is %. (Enter as a percentage and round to two decimal places.) The standard deviation for Asset Mis %. (Enter as a percentage and round to two decimal places.) The standard deviation for the portfolio is %. (Enter as a percentage and round to two decimal places d. How would you characterize the correlation of returns of the two stocks L and M? (Select the best answer below.) O A. Asset Land Asset M are not correlated, since they have different values for standard deviation B. Asset L and Asset M are slightly negatively correlated C. Asset L and Asset M are highly positively correlated. D. Asset Land Asset M are highly negatively correlated. e. Discuss any benefits of diversification achieved by Jamie through creation of the portfolio. (Select the best answer below.) O A. There is a significant benefit from diversification because the risk is higher than that of either stock and the average return is higher than that of either stock. B. There is a significant benefit from diversification because the risk is higher than that of either stock and the average return is somewhere in the middle OC. There is a significant benefit from diversification because the risk is lower than that of either stock and the average return is lower than that of either stock. OD. There is a significant benefit from diversification because the risk is lower than that of either stock and the average return is somewhere in the middle. 4: Data Table (Click the icon here in order to copy the contents of the data table below into a spreadsheet.) Year 2013 2014 2015 2016 2017 2018 Expected Return Stock L Stock M 13% 23% 13 19 15 18 18 16 18 13 21 8
