Calculate standard deviation of expected portfolio returns

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Reference no: EM131066564

Jamie Wong is considering building an investment portfolio containing two stocks, L and M. Stock L will represent 80% of the dollar value of the portfolio, and stock M will account for the other 20%. The expected returns over the next 6 years, 2015 - 2020, for each of these stocks are shown in the following:

Year Stock L Stock M

2015 14% 24%

2016 14% 22%

2017 15% 20%

2018 15% 18%

2019 15% 16%

2020 16% 14%

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

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

c. Calculate the standard deviation of expected portfolio returns 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.

Reference no: EM131066564

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