This preview shows pages 1–2. Sign up to view the full content.
1.
The portfolio weight of an asset is total investment in that asset divided by the total portfolio value.
First, we will find the portfolio value, which is:
Total value = 100($40) + 130($22) = $6,860
The portfolio weight for each stock is:
Weight
A
= 100($40)/$6,860 = .5831
Weight
B
= 130($22)/$6,860 = .4169
2.
The expected return of a portfolio is the sum of the weight of each asset times the expected return of
each asset. The total value of the portfolio is:
Total value = $2,300 + 3,400 = $5,700
So, the expected return of this portfolio is:
E(R
p
) = ($2,300/$5,700)(0.11) + ($3,400/$5,700)(0.16) = .1398 or 13.98%
5.
The expected return of an asset is the sum of the probability of each return occurring times the
probability of that return occurring. So, the expected return of the asset is:
E(R) = .3(–.09) + .7(.33) = .2040 or 20.40%
7.
The expected return of an asset is the sum of the probability of each return occurring times the
probability of that return occurring. So, the expected return of each stock asset is:
E(R
A
) = .15(.06) + .60(.07) + .25(.11) = .0785 or 7.85%
E(R
B
) = .15(–.2) + .60(.13) + .25(.33) = .1305 or 13.05%
To calculate the standard deviation, we first need to calculate the variance. To find the variance, we
find the squared deviations from the expected return. We then multiply each possible squared
deviation by its probability, then add all of these up. The result is the variance. So, the variance and
standard deviation of each stock is:
A
2
=.15(.06 – .0785)
2
+ .60(.07 – .0785)
2
+ .25(.11 – .0785)
2
= .00034
A
= (.00034)
1/2
= .0185 or 1.85%
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 02/23/2010 for the course FIN 81341 taught by Professor Yang during the Spring '10 term at CSU San Bernardino.
 Spring '10
 Yang

Click to edit the document details