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Benefits of diversification achieved through portfolio

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Question: Assume you are considering a portfolio containing two assets, L and M. Asset L will represent 40% of the dollar value of the portfolio, and asset M will account for the other 60%. 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%            20%

2019        14%            18%

2020        16%            16%

2021        17%            14%

2022        17%            12%

2023        19%            10%

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

b. Use an Excel spreadsheet to calculate the average portfolio return, rp, over the six-year period.

c. Use an Excel spreadsheet to calculate the standard deviation of expected portfolio returns, sp, over the six-year period.

d. How would you characterize the correlation of returns of the assets L and M?

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

Reference no: EM131624379

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