Jamie Wong is thinking of building an investment portfolio containing two stocks, L and M. Stock L will represent 20% of the dollar value of the portfolio, and stock M will account for the other 80%. The historical returns over the next 6 years, 2013−2018, for each of these stocks are shown in the following table: ( see attached table a. Calculate the actual 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.
Jamie Wong is thinking of building an investment portfolio containing two stocks, L and M. Stock L will represent 20% of the dollar value of the portfolio, and stock M will account for the other 80%. The historical returns over the next 6 years, 2013−2018, for each of these stocks are shown in the following table: ( see attached table a. Calculate the actual 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.
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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Jamie Wong is thinking of building an investment portfolio containing two stocks, L and M. Stock L will represent 20%
of the dollar value of the portfolio, and stock M will account for the other 80%. The historical returns over the next 6 years, 2013−2018, for each of these stocks are shown in the following table: ( see attached table
of the dollar value of the portfolio, and stock M will account for the other 80%. The historical returns over the next 6 years, 2013−2018, for each of these stocks are shown in the following table: ( see attached table
a. Calculate the actual 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.
Transcribed Image Text:Year
2013
2014
2015
2016
2017
2018
Expected return
Stock L
16%
18%
19%
20%
20%
22%
Stock M
22%
21%
20%
19%
18%
17%
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