Jamie Wong is thinking of building an investment portfolio containing two stocks, L and M. Stock…

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Jamie Wong is thinking of building an investment portfolio containing two stocks, L and M. Stock L will represent 25% of the dollar value of the portfolio, and stock M will account for the other 75%. The historical retums over the next 6 years, 2013-20 for each of these stocks are shown in the following table:

– Calculate the actual portfolio return, p: for each of the 6 years.

– . Calculate the expected value of portfolio returns, p over the 6-year period.

–Calculate the standard deviation of expected portfolio returns, o,i’ over the 6-year period.

– How would you characterize the correlation of returns of the two stocks L and M?

– Discuss any benefits of diversification achieved by Jamie through creation of the portfolio.

Expected Return

Year —– Stock L——–Stock M

2013——–15%———–24%

2014———16%———–23%

2015———18%—–+——22%

2016———19%————21%

2017———-21%————20%

2018———-21%————19%

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