Jamie Wong is considering building an investment portfolio containing two stocks

Question

Jamie Wong is considering building an investment portfolio containing two stocks, L and M. Stock L will represent 80% of the dollar value of the portfolio, and stock M will account for the other 20%. The expected returns over the next 6 years, 2015 - 2020, for each of these stocks are shown in the following:

Year    Stock L Stock M

2015    14%     24%

2016    14%     22%

2017    15%     20%

2018    15%     18%

2019    15%     16%

2020    16%     14%

a. Calculate the expected portfolio return, rp, for each of the 6 years.
b. Calculate the expected value of portfolio returns, rbarp, over the 6-year period.
c. Calculate the standard deviation of expected portfolio returns 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.

Explanation / Answer

·         Expected Return of a Portfolio is the weighted sum of the individual returns from the securities making up the portfolio: WL=0.80 WM=0.20 0.8 0.2 Year Stock L Stock M 2015 14% 24% 0.16 0.000069 0.00250 2016 14% 22% 0.156 0.000069 0.00090 2017 15% 20% 0.16 0.000003 0.00010 2018 15% 18% 0.156 0.000003 0.00010 2019 15% 16% 0.152 0.000003 0.00090 2020 16% 14% 0.156 0.000137 0.00250 a. Expected Return of Porfolio (Rp) 0.94 Mean 14.83% 19.00% Standard Deviation 0.000047 0.001167 Portfolio Standard Deviation Wl^2*Stl^2 0.0000000014 Wm^2*Stm^2 0.000000054 2Wl*Wm*Stl*Stm 0.000000018 Square root 0.000132778 b.&c. Standard Deviation of portfolio = 0.000132778

Related Questions

Navigate

• Browse (All)
• Browse J
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.