a. Calculate the actual portfolio return, rp. for each of the 6 years. b. Calculate the average return for each stock and for the portfolio over the 6-year period. c. Calculate the standard deviation of returns for each asset and for the portfolio. How does the portfolio standard deviation compare to the standard deviations of the individual assets? ...........
a. Calculate the actual portfolio return, rp. for each of the 6 years. b. Calculate the average return for each stock and for the portfolio over the 6-year period. c. Calculate the standard deviation of returns for each asset and for the portfolio. How does the portfolio standard deviation compare to the standard deviations of the individual assets? ...........
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Ch 5 q4 practice
Transcribed Image Text:### Investment Portfolio Problem
Jamie Wong is considering building an investment portfolio with two stocks, L and M. Stock L will represent 39% of the portfolio's dollar value, while stock M will account for the remaining 61%.
The historical returns from 2013 to 2018 for each stock are provided in the following table:
#### Tasks
1. **Calculate the actual portfolio return** (\(r_p\)) for each of the 6 years.
2. **Calculate the average return** for each stock and for the portfolio over the 6-year period.
3. **Calculate the standard deviation of returns** for each asset and for the portfolio. Assess how the portfolio's standard deviation compares to the individual assets.
4. **Characterize the correlation** of returns between stocks L and M.
5. **Discuss the benefits of diversification** achieved by Jamie through the portfolio creation.
### Data Table
| Year | Stock L Expected Return | Stock M Expected Return |
|------|-------------------------|-------------------------|
| 2013 | 14% | 23% |
| 2014 | 14% | 19% |
| 2015 | 16% | 16% |
| 2016 | 17% | 15% |
| 2017 | 17% | 13% |
| 2018 | 22% | 10% |
(Note: Click the icon to copy the data table into a spreadsheet.)
### Additional Task
- **Average Portfolio Return for 2013**: Calculate and round to one decimal place.
Using this information, Jamie can analyze the performance and risk characteristics of the potential portfolio to make informed investment decisions.
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