Jamie Wong is considering building an investment portfolio containing two stocks, L and M. Stock L will represent 55% of the dollar value of the portfolio, and stock M will account for the other 45%. The expected returns over the next 6 years, 20152020, for each of these stocks are shown in the following table:

Expected return

Year stock L Stock M

2015 16% 22%

2016 18% 21%

2017 19% 20%

2018 21% 19%

2019 21% 18%

2020 22% 17%

a: Calculate the expected portfolio return, r p, for each of the 6 years.

b: Calculate the expected value of portfolio returns, r overbar r p, over the 6-year period.

c: Calculate the standard deviation of expected portfolio returns, r p, 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.