Question

5-12 Portfolio return and standard deviation Jamie Wong is considering building a portfolio containing two assets, L and M. Asset L will represent 40% of the dollar value of the portfolio, and asset M will account for the other 60%. The expected returns over the next 6 years, 2004–2009, for each of these assets, are shown in the following table. Expected return Asset L Asset M Year 20% 14% 14 16 2004 2005 2006 2007 2008 2009 17 a. Calculate the expected portfolio return, kp, for each of the 6 years. b. Calculate the expected value of portfolio returns, ky, over the 6-year period. c. Calculate the standard deviation of expected portfolio returns, ok, over the 6-year period. d. How would you characterize the correlation of returns of the two assets L and M? c. Discuss any benefits of diversification achieved through creation of the portfolio

Answer 1

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