Question

Assume you are considering a portfolio containing two​ assets, L and M. Asset L will represent 39% of the dollar value of the​ portfolio, and asset M will account for the other 61%. The projected returns over the next 6​ years, 2018-2023, for each of these assets are summarized in the following​ table:

    Projected Return  
Year   Asset L   Asset M
2018   13%   21%
2019   13%   17%
2020   15%   17%
2021   17%   14%
2022   17%   12%
2023   18%   11%

a. Calculate the projected portfolio​ return, r overbar 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. How would you characterize the correlation of returns of the two assets L and​ M?

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

Answer 1

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