Question

Assume you are considering a portfolio containing two assets, L and M. Asset L will represent 36% of the dollar value of the portfolio, and asset M will account for the other 64%. The projected returns over the next six years, 2018–2023, for each of these assets are summarized in the following table. *huge thumbs up for correct answers*

	Projected Return (%)
Year	Asset L	Asset M
2018	15%	21%
2019	14%	17%
2020	16%	16%
2021	16%	14%
2022	17%	13%
2023	18%	9%

a.Use an Excel spreadsheet to calculate the projected portfolio return, r_p, for each of the six years.

b. The average expected portfolio​ return, r_p, over the 6-year period is (blank) %

c. The standard deviation of expected portfolio returns over the 6-year period is (blank) %

d. How would you characterize the correlation of returns of the two assets L and​ M? (neg. pos. or un-correlated)

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

A. By combining these two negatively correlated​ assets, the overall portfolio risk is increased.

B. By combining these two positively correlated​ assets, the overall portfolio risk is reduced.

C. By combining these two negatively correlated​ assets, the overall portfolio risk is reduced.

D.By combining these two negatively correlated​ assets, the overall portfolio risk is eliminated.

Answer 1

Given,

Weight of Asset L = 36% or 0.36

Weight of Asset M = 64% or 0.64

Solution :-

a) Projected portfolio return -