Assuming that you are considering a portfolio containing tow assets, L and M. Asset L will represent 40% of the dollar value of the portfolio, and M will account for the 60%. The expected returns over the next 6 years, 2009-2014, for each of these assets are summarized in the following table.
Expected Return (%)
Year Asset L Asset M
2009 14 20
2010 14 18
2011 16 16
2012 17 14
2013 17 12
2014 19 10
a) Calculate the expected portfolio return, for each of the 6 years.
b) Calculate the average expected portfolio return, for each of the 6-year period.
c) Calculate the standard deviation of expected portfolio returns over the 6 period
d) How would one characterize the correlation of returns of the two assets L and M?
e) Discuss any benefits of diversification achieved through creation of the portfolio.
This solution contains step-by-step calculations in an Excel file to determine the expected portfolio return, standard deviation, correlation of returns and also discusses a benefit of diversification.