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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.
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