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Principles of managerial finance. Twelfth edition (2009) chapter 5 risk and return. P5-13 Personal Finance problem. 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 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 portfolio over 6 year period. d. How would you characterize the correlation of returns of the stocks L and M e. Discuss any benefits of diversification achieved by Jamie through creation of the portfolio.
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