Review qs

Portfolio return and standard deviation. Jamie Wong is thinking of building an investment portfolio containing two stocks, L and M. Stock L will represent 50% of the dollar value of the portfolio, and stock M will account for the other 50%. The historical returns over the next 6 years, 2013 minus 2018, for each of these stocks are shown in the following table:

2013 14% 23% 2014 16% 21% 2015 18% 19% 2016 20% 17% 2017 21% 15% 2018 21% 13%

a.Calculate the actual portfolio return, r_p, for each of the 6 years.

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

c.Calculate the standard deviation of expected portfolio returns, sigma subscript 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.