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.

a. Calculate the actual portfolio return,r Subscript p, 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? (choose best answer below)

A.Asset L and 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 L and Asset M are highly negatively correlated.

Discuss any benefits of diversification achieved by Jamie through creation of the portfolio. (Select the best answer below.)

A.The standard deviation (risk) of portfolio returns is 1.86%, lower than either asset (2.40% for Asset L and 5.05% for Asset M). So holding the two assets as a portfolio yields a diversification benefit, indicating the returns on Asset L and M must be perfectly positively correlated.

B.The standard deviation (risk) of portfolio returns is 5.05%, higher than either asset (2.40% for Asset L and 1.86% for Asset M). So holding the two assets as a portfolio yields a diversification benefit, indicating the returns on Asset L and M must be less than perfectly negatively correlated.

C.The standard deviation (risk) of portfolio returns is 1.86%, lower than either asset (5.05% for Asset L and 2.40% for Asset M). So holding the two assets as a portfolio yields a diversification benefit, indicating the returns on Asset L and M must be less than perfectly positively correlated.

D.The standard deviation (risk) of portfolio returns is 1.86%, lower than either asset (2.40% for Asset L and 5.05% for Asset M). So holding the two assets as a portfolio yields a diversification benefit, indicating the returns on Asset L and M must be less than perfectly positively correlated.