Question

Assume you are considering a portfolio containing two assets, L and M. Asset L will represent 45% of the dollar value of the portfolio, and asset M will account for the other 55%. The projected returns over the next six years, 2018–2023, for each of these assets are summarized in the following table.

	Projected Return (%)
Year	Asset L	Asset M
2018	14%	21%
2019	13%	18%
2020	15%	15%
2021	17%	15%
2022	16%	11%
2023	20%	11%

a.Use an Excel spreadsheet to calculate the projected portfolio return, r_p, for each of the six years.

b. The average expected portfolio​ return, r_p, over the 6-year period is (blank) %

c. The standard deviation of expected portfolio returns over the 6-year period is (blank) %

d. How would you characterize the correlation of returns of the two assets L and​ M? (neg. pos. or un-correlated)

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

A. By combining these two negatively correlated​ assets, the overall portfolio risk is increased.

B. By combining these two positively correlated​ assets, the overall portfolio risk is reduced.

C. By combining these two negatively correlated​ assets, the overall portfolio risk is reduced.

D.By combining these two negatively correlated​ assets, the overall portfolio risk is eliminated.

Answer 1

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