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Portfolio return and standard deviation Personal Finance Problem Jamie Wong is thinking of building an investment portfolio containing two stocks, L and M. Stock L will represent 50% of the dollar value of the portfolio, and stock M will account for the other 50%. The historical returns over the next 6 years, 2013-2018, for each of these stocks are shown in the following table: a. Calculate the actual portfolio return, r. for each of the 6 years. b. Calculate the expected value of portfolio returns. p. over the 6-year period. c. Calculate the standard deviation of expected portfolio returns, or 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.

Portfolio return and standard deviation Personal Finance Problem Jamie Wong is thinking of building an investment portfolio containing two stocks, L and M. Stock L will represent 50% of the dollar value of the portfolio, and stock M will account for the other 50%. The historical returns over the next 6 years, 2013-2018, for each of these stocks are shown in the following table: a. Calculate the actual portfolio return, r. for each of the 6 years. b. Calculate the expected value of portfolio returns. p. over the 6-year period. c. Calculate the standard deviation of expected portfolio returns, or 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
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
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**Portfolio return and standard deviation** **Personal Finance Problem** Jamie Wong is thinking of building an investment portfolio containing two stocks, L and M. Stock L will represent 50% of the dollar value of the portfolio, and stock M will account for the other 50%. The historical returns over the next 6 years, 2013 – 2018, for each of these stocks are shown in the following table: [Table Image] a. Calculate the actual portfolio return, rₚ, for each of the 6 years. b. Calculate the expected value of portfolio returns, ȓₚ, over the 6-year period. c. Calculate the standard deviation of expected portfolio returns, σₚ, 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. **a.** The actual portfolio return for year 2013 is [Blank] %. (Round to two decimal places.) [The rest of the document does not include graphs or diagrams that require a detailed explanation.]
Transcribed Image Text:**Portfolio return and standard deviation** **Personal Finance Problem** Jamie Wong is thinking of building an investment portfolio containing two stocks, L and M. Stock L will represent 50% of the dollar value of the portfolio, and stock M will account for the other 50%. The historical returns over the next 6 years, 2013 – 2018, for each of these stocks are shown in the following table: [Table Image] a. Calculate the actual portfolio return, rₚ, for each of the 6 years. b. Calculate the expected value of portfolio returns, ȓₚ, over the 6-year period. c. Calculate the standard deviation of expected portfolio returns, σₚ, 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. **a.** The actual portfolio return for year 2013 is [Blank] %. (Round to two decimal places.) [The rest of the document does not include graphs or diagrams that require a detailed explanation.]
**Expected Return Analysis for Stocks L and M (2013-2018)** The table presents the expected returns for two stocks, L and M, over the span of six years, from 2013 to 2018. - **2013**: - Stock L: 14% - Stock M: 23% - **2014**: - Stock L: 16% - Stock M: 22% - **2015**: - Stock L: 16% - Stock M: 21% - **2016**: - Stock L: 18% - Stock M: 20% - **2017**: - Stock L: 18% - Stock M: 19% - **2018**: - Stock L: 18% - Stock M: 18% **Analysis Summary:** - Stock L shows a gradual increase in expected returns from 14% in 2013 to 18% in 2016, maintaining this level through 2018. - Stock M starts with a higher expected return of 23% in 2013, which diminishes annually until it aligns with Stock L at 18% by 2018. This tabular data is essential for understanding trends in expected stock returns over a given period, illustrating how Stock L and Stock M have performed in relation to each other and over time.
Transcribed Image Text:**Expected Return Analysis for Stocks L and M (2013-2018)** The table presents the expected returns for two stocks, L and M, over the span of six years, from 2013 to 2018. - **2013**: - Stock L: 14% - Stock M: 23% - **2014**: - Stock L: 16% - Stock M: 22% - **2015**: - Stock L: 16% - Stock M: 21% - **2016**: - Stock L: 18% - Stock M: 20% - **2017**: - Stock L: 18% - Stock M: 19% - **2018**: - Stock L: 18% - Stock M: 18% **Analysis Summary:** - Stock L shows a gradual increase in expected returns from 14% in 2013 to 18% in 2016, maintaining this level through 2018. - Stock M starts with a higher expected return of 23% in 2013, which diminishes annually until it aligns with Stock L at 18% by 2018. This tabular data is essential for understanding trends in expected stock returns over a given period, illustrating how Stock L and Stock M have performed in relation to each other and over time.
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