If consider the individual stocks have the following

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Unformatted text preview: llowing expected returns, what is the expected return for the portfolio? what DCLK: 19.69% KO: 5.25% INTC: 16.65% KEI: 18.24% E(RP) = .133(19.69) + .2(5.25) + .267(16.65) + .4(18.24) .133(19.69) = 15.41% 15.41% Portfolio Variance Portfolio Compute the portfolio return for each state: RP = w1R1 + w2R2 + … + wmRm Compute the expected portfolio return using the Compute same formula as for an individual asset same Compute the portfolio variance and standard Compute deviation using the same formulas as for an individual asset individual Example: Portfolio Variance Example: Consider the following information Invest 50% of your money in Asset A State Probability A B Boom .4 30% -5% Bust .6 -10% 25% What are the expected return and standard deviation for each asset? Asset A: E(RA) = .4(30) + .6(-10) = 6% Asset Variance(A) = .4(30-6)2 + .6(-10-6)2 = 384, Std. Dev.(A) = 19.6% Variance(A) Asset B: E(RB) = .4(-5) + .6(25) = 13% Asset Variance(B) = .4(-5-13)2 + .6(25-13)2 = 216, Std. Dev.(B) = 14.7% Variance(B) What are the expected return and standard deviation for the portfolio? Portfolio return in boom = .5(30) + .5(-5) = 12.5 Portfolio Portfolio return in bust = .5(-10) + .5(25) = 7.5 => Portfolio Expected return = .4(12.5) + .6(7.5) = 9.5 or .5(6) + .5(13) = 9.5 Expected Variance of portfolio = .4(1...
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This note was uploaded on 04/13/2010 for the course BUSINESS engl 102 taught by Professor Seyhanözmenek during the Spring '10 term at Middle East Technical University.

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