Question

Assume you are considering a portfolio containing two​ assets, L and M. Asset L will represent 39 % of the dollar value of the​ portfolio, and asset M will account for the other 61 %. The projected returns over the next 6​ years, 2018-2023​, for each of these assets are summarized in the following​ table: LOADING....

a. Calculate the projected portfolio​ return, r over p​, for each of the 6 years.

b. Calculate the average expected portfolio​ return, r over p​, over the​ 6-year period.

c. Calculate the standard deviation of expected portfolio​ returns, s Subscript p​, over the​ 6-year period.

d. How would you characterize the correlation of returns of the two assets L and​ M?

e. Discuss any benefits of diversification achieved through creation of the portfolio.

The projected portfolio return, for 2018 is L%. (Round to two decimal places.) The projected portfolio return. g. for 2019 is D%. (Round to two decimal places ) The projected portfolio return for 2020 is D% (Round to two decimal places ) The projected portfolio return, g for 2021 is D% (Round to two decimal places ) The projected portfolio return, lp , for 2022 is 96 (Round to two decimal places ) The projected portfolio return, for 2023 is□% (Round to two decimal places) b. The average expected portfolio return, p, over the 6-year period is Data Table Click on the icon located on the top-right comer of the data table below in order to copy its contents into a spreadsheet.) Projected Return Year 2018 2019 2020 2021 2022 2023 Asset L 14% 15% 16% 18% 16% 18% Asset M 20% 13% 15% 13% 13% 10% Round to two decimal places.) c The standard deviation of expected portfolio returns 8p Over the 6-year period is % Round to three decimal places d. How would you characterize the correlation of returns of the two assets L and M? The assets are correlated (Select from the drop-down menu,) Print Done e. Discuss any benefits of diversification achieved through creation of the portfolio (Select the best choice below) O A. By combining these two negatively correlated assets, the overall portfolio risk is eliminated. O B. By combining these two negatively correlated assets, the overall portfolio risk is reduced O C. By combining these two positively correlated assets, the overall portfolio risk is reduced O D. By combining these two negatively correlated assets, the overall portfolio risk is increased.

Answer 1

a.The projected portfolio return for 2018 is 17.66%

The projected portfolio return for 2018 is 17.44%

The projected portfolio return for 2018 is 15.39%

The projected portfolio return for 2018 is 14.95%

The projected portfolio return for 2018 is 14.17%

The projected portfolio return for 2018 is 13.12%

b.15.45%

c.2.69%

d. negatively

e. b

The above has been calculated as follows -

Year	Expected Return % Asset L	Expected Return % Asset M	Return	σ	(σ2)	Asset L (σ)	Asset L(σ2)	Asset M(σ)	Asset M(σ2)	σLσm
2018	14	20	17.66	2.21	4.88	-2.17	4.71	5	25	-10.85
2019	15	19	17.44	1.99	3.96	-1.17	1.37	4	16	-4.68
2020	16	15	15.39	-0.06	0.0036	-0.17	0.029	0	0	0
2021	18	13	14.95	-0.5	0.25	1.83	3.35	-2	4	-3.66
2022	16	13	14.17	-1.28	1.64	-0.17	0.029	-2	4	0.34
2023	18	10	13.12	-2.33	5.43	1.83	3.35	-5	25	-9.15
Sum	97	90	92.73		16.16
Average	16.17	15	15.45		2.69		2.14		12.33	-28

Correlation coefficient = -28/√92.73√16.16

=-0.7233