Portfolio return and standard deviation

Personal Finance Problem

Jamie Wong is thinking of building an investment portfolio containing two stocks, L and M. Stock L will represent 30% of the dollar value of the portfolio, and stock M will account for the other 70%. The historical returns over the next 6 years, 2013-2018, for each of these stocks are shown in the following table:

Expected return

Year: 2013

Stock L: 16%

Stock M: 24%

Year: 2014

Stock L: 17%

Stock M: 23%

Year: 2015

Stock L: 19%

Stock M: 22%

Year: 2016

Stock L: 20%

Stock M: 21%

Year: 2017

Stock L: 21%

Stock M: 20%

Year: 2018

Stock L: 22%

Stock M: 19%

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

b. Calculate the expected value of portfolio returns, rp, over the 6-year period.

c. Calculate the standard deviation of expected portfolio returns, 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.