Principles of managerial finance by JnNi205


									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

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