Question

Assume you are considering a portfolio containing two​ assets, L and M. Asset L will represent 58 % of the dollar value of the​ portfolio, and asset M will account for the other 42 %. Assume that the portfolio is rebalanced at the end of each year. The expected returns over the next 6​ years, 2018-2023​, for each of these assets are summarized in the following​ table:

Projected Return

Year Asset L Asset M

2018 14% 19​%

2019 13​% 18​%

2020 17​% 15​%

2021 18​% 13​%

2022 18​% 11​%

2023 19​% 10​%

a. Calculate the expected portfolio​ return, rp​, for each of the 6 years.

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

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

d. Assume that asset L represents 42 % of the portfolio and asset M 58 %. Calculate the average expected return and standard deviation of expected portfolio returns over the​ 6-year period.

e. Compare your answers to the answers from parts b and c.

Answer 1

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