Question :

Jamie Wong is considering building an investment portfolio containing two stocks, L and M. Stock L can represent 40% of the dollar value of the portfolio, and stock M will account for the other 60 percent. The expected returns over the next 6 years, 2013-2018, for each of these stocks are given in the subsequent table.

Year Stock L expected return Stock M expected return

2013 14% 20%

2014 14% 18%

2015 16% 16%

2016 17% 14%

2017 17% 12%

2018 19% 10%

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

b. Evaluate the expected value of portfolio returns, rp, (line over the r) over the 6-year period.

c. Determine the standard deviation of expected portfolio returns, orp, over the 6-year period.

d. How could you characterize the correlation of returns of the two stocks L and M?

e. Show any benefits of diversification achieved by Jamie through creation of the portfolio.