Jamie Wong is considering building an investment portfolio containing two stocks, L and M. Stock L will represent 40% of the dollar value of the portfolio, and stock M will account for the other 60%. The expected returns over the next 6 years, 2015–2020, for each of these stocks are shown in the following table.

a. Calculate the expected portfolio return, r_p, for each of the 6 years.
b. Calculate the expected value of portfolio returns, r_p, over the 6-year period.
c. Calculate the standard deviation of expected portfolio returns, σ_rp, 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.

Transcribed Image Text:

Year 2015 2016 2017 2018 2019 2020 Expected return Stock L 14% 14 16 17 17 19 Stock M 20% 18 16 14 12 10