Question

Assume you are considering a portfolio containing two​ assets, L and M. Asset L will represent 56 % of the dollar value of the​ portfolio, and asset M will account for the other 44 %. Assume that the portfolio is rebalanced at the end of each year. The expected returns over the next 6​ years, 2018dash2023​, for each of these assets are summarized in the following​ table:

	Projected Return
Year	Asset L	Asset M
2018	14%	21%
2019	14%	17%
2020	16%	17%
2021	18%	13%
2022	16%	12%
2023	18%	10%

a. Calculate the expected portfolio​ return, r Subscript p​, for each of the 6 years. b. Calculate the average expected portfolio​ return, r overbar Subscript p​, over the​ 6-year period. c. Calculate the standard deviation of expected portfolio​ returns, s Subscript p​, over the​ 6-year period. d. Assume that asset L represents 44 % of the portfolio and asset M 56 %. Calculate the average expected return and standard deviation of expected portfolio returns over the​ 6-year period. e. Compare your answers to the answers from parts b and c.

Answer 1

a. Calculate the expected portfolio return as follows:

b. Calculate the average rate of return as follows:

c. Calculate the standard deviation as follows:

d. Calculate the average rate of return and standard deviation with changed probabilities as follows: