Portfolio return and standard deviation Jamie Wong is thinking of building an investment portfolio containing two...

Transcribed Image Text:

Portfolio return and standard deviation Jamie Wong is thinking of building an investment portfolio containing two exchange traded funds (ETFs). Jamie plans to invest $3,000 in Vanguard S&P 500 ETF (VOO) and $7,000 in Invesco QQQ Trust (QQQ). Jamie has decided to analyze some historical returns to get a sense for her portfolio's possible future risk and return. Six years of historical annual returns for each ETF are shown in the following table: a. Calculate the portfolio return, r,, for each of the 6 years assuming that 30% is invested in VOO and 70% is invested in QQQ. b. Calculate the average annual return for each ETF and the portfolio over the six-year period. c. Calculate the standard deviation of annual returns for each ETF and the portfolio. How does the portfolio standard deviation compare to the standard deviations of the individual ETFs? d. Calculate the correlation coefficient for the two ETFs. How would you characterize the correlation of returns of the two ETFs? e. Discuss any likely benefits of diversification achieved by Jamie through creation of the portfolio. a. The portfolio return for year 2014 is %. (Round to two decimal places.) Data table (Click on the icon here in order to copy the contents of the data table below into a spreadsheet.) Historical return Year Voo 2014 12.65% QQQ 18.13% 2015 2.89% 9.19% 2016 12.82% 6.43% 2017 21.15% 32.34% 2018 - 4.79% -0.99% 2019 31.62% 38.56% Print Done Portfolio return and standard deviation Jamie Wong is thinking of building an investment portfolio containing two exchange traded funds (ETFs). Jamie plans to invest $3,000 in Vanguard S&P 500 ETF (VOO) and $7,000 in Invesco QQQ Trust (QQQ). Jamie has decided to analyze some historical returns to get a sense for her portfolio's possible future risk and return. Six years of historical annual returns for each ETF are shown in the following table: a. Calculate the portfolio return, r,, for each of the 6 years assuming that 30% is invested in VOO and 70% is invested in QQQ. b. Calculate the average annual return for each ETF and the portfolio over the six-year period. c. Calculate the standard deviation of annual returns for each ETF and the portfolio. How does the portfolio standard deviation compare to the standard deviations of the individual ETFs? d. Calculate the correlation coefficient for the two ETFs. How would you characterize the correlation of returns of the two ETFs? e. Discuss any likely benefits of diversification achieved by Jamie through creation of the portfolio. a. The portfolio return for year 2014 is %. (Round to two decimal places.) Data table (Click on the icon here in order to copy the contents of the data table below into a spreadsheet.) Historical return Year Voo 2014 12.65% QQQ 18.13% 2015 2.89% 9.19% 2016 12.82% 6.43% 2017 21.15% 32.34% 2018 - 4.79% -0.99% 2019 31.62% 38.56% Print Done