This preview shows pages 1–2. Sign up to view the full content.
Problem Set 4
ECN 134
Finance Economics
Prof. Farshid Mojaver
Risk and Return
1
. You consider investing in one of three portfolios X, Y, or Z, for one year. The means
and standard deviations of annual returns in % for the three portfolios are given by the
following matrix; annual returns are distributed normally:
X
Y
Z
Mean
5
7
5
Std. Dev.
20
20
10
Rank the three portfolios in order of the probability of
i)
the oneyear return being negative,
ii)
the oneyear return being less than 5 %,
iii)
the oneyear return being less than 10 %.
(Hint) you do not need a table for the normal distribution to arrive at the correct answers
to i) through iii)
iv)
Could you imagine a rational investor preferring X to Y?
v)
Could you imagine a rational investor preferring X to Z?
vi)
Could you imagine a riskaverse investor preferring X to Z?
2
. Based on the scenarios below, what is the expected return for a portfolio with the
following return profile?
Market Condition
Bear
Normal
Bull
Probability
0.2
0.3
0.5
Rate of return
25%
10%
24%
Use the following scenario analysis for Stocks X and Y to answer Problems 3
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
This is the end of the preview. Sign up
to
access the rest of the document.
This note was uploaded on 11/02/2009 for the course ECON 134 taught by Professor Mojaver during the Summer '08 term at UC Davis.
 Summer '08
 MOJAVER
 Economics

Click to edit the document details