Question

auate the portfolio standard deviation. 1ab iwolld w il ASsume you are considering 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 A 60%. The projected returns over the next six years, 2018-2023, for each of these assets are summarized in the following table. Projected Return 91 192 to anin Year Asset L Asset M 2018 14% 20% inogo 2019 14% 18% 2020 191 16 % 16% 14% nd Low cofficient forH 2021 17 % OW 2022 17 % 12% lo dosa i sain ow odlo 2023 19% 10 % 162 a. Use an Excel spreadsheet to calculate the projected portfolio return, , for each of the six years. b. Use an Excel spreadsheet to calculate the average portfolio return, , over the six-year n oilotnog s barauno period. S soda 1o lan C. Use an Excel spreadsheet to calculate the standard deviation of expected portfolio ion returns, Sps Over the six-year period. d. How would you characterize the correlation of returns of the assets L and M? e. Discuss any benefits of diversification achieved through creation of the portfolio. i bsbo ee bo elopde

Answer 1

14% Year Asset L Asset M 2018 14% 20% 2019 18% 2020 16% 16% 2021 17% 14% 2022 2023 19% Yearly Average Return (ro) 17.60% 16.40% 16.00% 15.20% 14.00% 13.60% 17% 12% 10% Avg ret=w*Return in year + W *Return in year 40% 60% Weight of Asset L(w) = Weight of Asset M (WM) = Average Return for L (1) = Average Return for M (M) = Average Portfolio return over 6 years (rP) = Portfolio Standard Deviation (sa) = Correlation between L&M= 16.17% --> 15.00% 15.47% --> 0.015 -0.964 --> Using the AVERAGE function in excel Using the AVERAGE function in excel Avg ret = w. *Average Return for L+WM* Average return for M Using the STDEV.S function in excel Using the CORREL function in excel