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HW4SSII09

# HW4SSII09 - Problem Set 4 ECN 134 Finance Economics Risk...

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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 one-year return being negative, ii) the one-year return being less than 5 %, iii) the one-year 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 risk-averse 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%

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