Q3. Jamie Wong is considering building an investment portfolio containing two stocks, L and M.Stock L will represent 40% of the dollar value of the portfolio, and stock M will account for theother 60%. The expected returns over the next 6 years, 2013-2018, for each of these stocks areshown in the following table.Expected returnYearStock LStock M201314%20%2014141820151616201617142017171220181910a. Calculate the expected portfolio return, rp, for each of the 6 years.b. Calculate the expected value of portfolio returns, , over the 6-year period.c. Calculate the standard deviation of expected portfolio returns, 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.

a. Calculate the expected portfolio return, rp, for each of the 6 years. b. Calculate the expected value of portfolio returns, , over the 6-year period. c. Calculate the standard deviation of expected portfolio returns, over the 6-year period.

a. Calculate the expected portfolio return, rp, for each of the 6 years. b. Calculate the expected value of portfolio returns, , over the 6-year period. c. Calculate the standard deviation of expected portfolio returns, over the 6-year period.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter2: Risk And Return: Part I

Section: Chapter Questions

Problem 11P

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Concept explainers

Risk and return

Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.

Capital Asset Pricing Model

Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.

Question

Q3. Jamie Wong is considering building an investment portfolio containing 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, 2013-2018, for each of these stocks are
shown in the following table.
Expected return
Year
Stock L
Stock M
2013
14%
20%
2014
14
18
2015
16
16
2016
17
14
2017
17
12
2018
19
10
a. Calculate the expected portfolio return, rp, for each of the 6 years.
b. Calculate the expected value of portfolio returns, , over the 6-year period.
c. Calculate the standard deviation of expected portfolio returns, 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.

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