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Unformatted text preview: 15-9.9)2 + .5(10-9.9)2 + .2(2-9.9)2 = 20.29 σ = 4.5 4.5 σ 2 = .3(25-17.7)2 + .5(20-17.7)2 + .2(1-17.7)2 = 74.41 σ = 8.63 8.63 Stock T Another Example Another Consider the following information: State Boom Normal Slowdown .15 Recession .10 Probability .25 .50 ABC, Inc. (%) 15 8 4 -3 What is the expected return? E(R) = .25(15) + .5(8) + .15(4) + .1(-3) = 8.05% What is the variance? Variance = .25(15-8.05)2 + .5(8-8.05)2 + .15(4-8.05)2 + .1(-3-8.05)2 = 26.7475 .1(-3-8.05) What is the standard deviation? Standard Deviation = 5.1717985% Portfolios Portfolios A portfolio is a collection of assets An asset’s risk and return are important in how An they affect the risk and return of the portfolio they The risk-return trade-off for a portfolio is The measured by the portfolio expected return and standard deviation, just as with individual assets standard Example: Portfolio Weights Example: Suppose you have \$15,000 to invest and you Suppose have purchased securities in the following amounts. What are your portfolio weights in each security? each \$2000 of DCLK \$3000 of KO \$4000 of INTC \$6000 of KEI •DCLK: 2/15 = .133 •KO: 3/15 = .2 •INTC: 4/15 = .267 •KEI: 6/15 = .4 Portfolio Expected Returns Portfolio The expected return of a portfolio is the weighted The average of the expected returns of the respective assets in the portfolio in E ( RP ) = ∑ w j E ( R j ) j =1 m Example: Expected Portfolio Returns Returns Consider the portfolio weights computed previously. If Consider the individual stocks have the fo...
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