## Jamie Wong Solution

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Portfolio return and standard deviation Jamie Wong is considering building an

investment portfolio containing two stocks, L and M. Stock L will represent 40% of

the dollar value of the portfolio, and stock M will account for the other 60%. The

expected returns over the next 6 years, 2010–2015, for each of these stocks are

shown in the following table:

Expected return

Year Stock L Stock M

2010 14% 20%

2011 14 18

2012 16 16

2013 17 14

2014 17 12

2015 19 10

a. Calculate the expected portfolio return, rp, for each of the 6 years.

b. Calculate the expected value of portfolio returns, , over the 6-year period.

c. Calculate the standard deviation of expected portfolio returns, rp, 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.