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:
Year Stock L Stock M
2015 14% 20%
2016 14% 18%
5017 15% 16%
2018 15% 14%
2019 16% 12%
2020 16% 10%
a. Calculate the expected 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, σrp, 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.