Practice Question $1$

The President Corporate Finance for Megastore Holdings is considering building an

investment portfolio to diversify the firm's large cash surplus. The portfolio will contain 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, $2024-2029,$ for

each of these stocks are shown in the following table.

a$.$ Calculate the expected portfolio return for each of the $6$ years and calculate the expected value

of portfolio returns over the $6-$year period.

b$.$ Calculate the standard deviation of expected portfolio returns, over the $6-$year period. How

would you characterize the correlation of returns of the two stocks $L$ and $M?$

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