Jamie Wong is thinking of 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 historical returns over the next 6 years, 2013-2018 for each of these stocks are shown in the following table: 2013 16% 22% 2014 17% 21% 2015 19% 20% 2016 21% 19% 2017 22% 18% 2018 23% 17% a. Calculate the actual portfolio return, Subscript p

EBK CONTEMPORARY FINANCIAL MANAGEMENT
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Chapter8: Analysis Of Risk And Return
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Jamie Wong is thinking of 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 historical returns over the next 6 years,
2013-2018
for each of these stocks are shown in the following table:
2013 16% 22%
2014 17% 21%
2015 19% 20%
2016 21% 19%
2017 22% 18%
2018 23% 17%
a. Calculate the actual portfolio return,
r Subscript 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 Sub Subscript 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.
Transcribed Image Text:Jamie Wong is thinking of 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 historical returns over the next 6 years, 2013-2018 for each of these stocks are shown in the following table: 2013 16% 22% 2014 17% 21% 2015 19% 20% 2016 21% 19% 2017 22% 18% 2018 23% 17% a. Calculate the actual portfolio return, r Subscript 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 Sub Subscript 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.
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