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.