Characterize the correlation of returns


Assuming that you are considering a portfolio containing tow assets, L and M. Asset L will represent 40% of the dollar value of the portfolio, and M will account for the 60%. The expected returns over the next 6 years, 2009-2014, for each of these assets are summarized in the following table.

Expected Return (%)

Year Asset L Asset M

2009 14 20

2010 14 18

2011 16 16

2012 17 14

2013 17 12

2014 19 10

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

b) Calculate the average expected portfolio return, for each of the 6-year period.

c) Calculate the standard deviation of expected portfolio returns over the 6 period

d) How would one characterize the correlation of returns of the two assets L and M?

e) Discuss any benefits of diversification achieved through creation of the portfolio.

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Finance Basics: Characterize the correlation of returns
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