Question

| Assur e you are con denn a porto o conlan ng are summanized in the tolowing table o assets L 톄n M Asset L wil le resen 35% o e dolar value o e por o, and esset M will account or lhe other 65%. The pro led returns over te nex 6 years, 2018 2023 or each o hese assets a. Cate the projected portolio retum, r tor each of the 6 years b. Calculate the average expected portfolio relurn, p over lhe 6-year period. C. Cakulale Uhe slaridaid devialion of expected porlfolio reluns, Sp uver lhe 6-year pericd d. How would you characterize the correlation of returns of the two assets L end M? e. Discuss any benefits of diversification achieved through creation of the portfolio. 1 Data Table (Click on the icon located on the top-right comer of the data table below in order to copy its contents into spreadsheet.) a. The projecled portfolio retur,r for 2018 is Round to two decimal places.) (Round to two decimal places ) Rourid to two docimal places (Round to two decimal places) Round to two decimal places.) Projected Return he projected portfolio return, 'O tor 20198 L% The projoclod portfolio oluan, 'p-for 2020s % lhe projected porttolo return, ,0, tr 2021 is The projected portfolio return, for 2022 is Asset L Asset M 19% 18% 17% 13% 13% 11% Year 2019 2020 2021 2022 15% 13% 15% 17% 16% 19% %. ( The projected portfolio return, fp,for 2023 is. (Round to two decimal places.j Print Done b. The average ex peu ted pol olio return 'o ovet the 6-year period is П%. ( c. The standard deviaian of experted pums, sover the-year peid is d. Hถw would you characterr the correlation of retums ot lhe two assets l and M? Round o decnal places.) (Round to three dec.mal plscs )

Answer 1

Asset L has 35% weightage and asset M has 65% weightage

Year	Return on L(%)	Return on M(%)	Portfolio return(%)
2018	15	19	17.6 [(15x.35)+(19x.65)]
2019	13	18	16.25
2020	15	17	16.3
2021	17	13	14.4
2022	16	13	14.05
2023	19	11	13.8
Average return(%)	15.83	15.17	15.4
Standard deviation	1.86	2.97	1.4

a. Calculate the projected portfolio return for each of the 6 years: (see table above)

The projected portfolio return for 2018 is 17.6%

The projected portfolio return for 2019 is 16.25%

The projected portfolio return for 2020 is 16.3%

The projected portfolio return for 2021 is 14.4%

The projected portfolio return for 2022 is 14.05%

The projected portfolio return for 2023 is 13.8%

b. The average expected portfolio return over the 6 year period is 15.4%

c. The standard deviation of expected portfolio return over the 6 year period is 1.4

d. The correlation of returns of the assets L and M is negative as when returns on asset L go up, the returns on asset M go down and vice versa

e. Because the correlation between the 2 assets is negative, the benefits of diversification can be achieved through creation of the portfolio.