Question

Portfolio return and standard deviation Personal Finance Problem Jamie Wong is thinking of building an investment portfolio containing two stocks, L and M. Stock L will represent 45% of the dollar value of the portfolio, and stock M will account for the other 55%. The historical returns over the next 6 years, 2013-2018, for each of these stocks are shown in the following table: a. Calculate the actual portfolio return, ro, for each of the 6 years. b. Calculate the expected value of portfolio returns, in over the 6-year period. c. Calculate the standard deviation of expected portfolio returns, or 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. 1 Data Table - X in order to copy the contents of the data table below (Click on the icon here into a spreadsheet.) 16% Year 2013 2014 2015 2016 2017 2018 Expected return Stock L Stock M 24% 18% 23% 18% 22% 20% 21% 20% 20% 19% 21% Print Done

Answer 1

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? v L 1 ENG 05:49 21-03-2020 24 11087 A B C D E F G H I J K L - year asset L (RL) 2013 16% 2014 18% 2015 18% 2016 2017 20% 2018 21% formula = rp =WL* RL + WM*RM WL=0.45, WM=0.55 asset M (RM) Portfolio return (rp) 24% 20.40% 23% 20.75% 22% 20.20% 21% 20.55% 20% 20.00% 19% 19.90% 20% AVERAGE EXPECTED PORTFOLIO RETURN 20.30% (=AVERAGE(E1088:E1093)] 1084 1085 1086 1087 a 1088 1089 1090 1091 1092 1093 1094 1095 b 1096 1097 1098 1099 1100 d 1101 1102 1103 1104 e 1105 1106 1107 STANDARD DEVIATION OF PORTFOLIO RET 0.327% STDEV.S(E1088:E1093) CORRELATION BETWEEN ASSET L & M= -0.961 CORREL(C1088:C1093,D1088:D1093) THE ASSETS ARE NEGATIVELY CORRELATED By combining these two negatively correlated assets, the overall portfolio risk is reduced. capm-portfolio retirement futures margin PV,FV, ANNUITY ACC CVP KE BOND HPR REALISED YIELD NPV RAK ROE std costing EPS%, ECONOMY...