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Chapter 8: Risk
and
Rates
of
R.eturn
(213)
Assignments:
^,
ST4 , ST5 (only b
,
e and
f)
on page 344
b.
#810, 11,23 on page345350 dueon Tuesday (1012712008)
4. Portfolio return and Portfolio risk
The definition of portfolio is a collection of securities (such as stocks or bonds).
The purpose of understanding portfolio returns and portfolio risk is two fold:
(1) You need to know how to compute portfolio returns and portfolio risk per
se.
(2) You can understand the effects of diversification only after understanding portfolio returns and
risk.
Example
1
weight
ur
=0'5
wz=o'5
Portfolio
I
Year
rt
(%)
/2
rp=wlrl+w2r2
2001
40
28
3{
:0,5*10+0.5*28
2002
10
20
5
2003
35
41
18
2004
5
t7
ll
2005
t5
J
I
Expected return
t5
l5
l5:0.5*15 +
0.5o15
Total risk
22.61
20.6J=
/o+sl'
*
ts

rsy *
1:a
rry
<t
I
r5); + (e l5)'
!
5l
CV
1.51
1.50
r.38
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View Full Document (4) Compute the expected return, total risk, and CV of portfolio 2 and 3.
weight
wr
=0'5
wz=o'5
Portfolio 2
Year
rt
$)
12
rp
=Wtrl*Wrr2 f/o)
2001
40
t0
I5
2002
10
40
t:
2003
35
5
l5
2004
5
35
r5
2005
l5
l5
l5
Expected return,
i,
l5
t5
l5
Total risk
(o,)
22.64
22.61
0
CV
0
weight
wr
=0'5
wz:O'5
Portfolio 3
Year
\
(%)
12
rp:wtrl+w2r2
(Vo)
2001
40
40
1G
2002
10
10
10
2003
35
35
35
2004
5
5
f,
2005
l5
r5
15
Expected return
15
l5
l5
Total risk
22.61
22.61
22.64
CV
1.51
5. Diversification
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This note was uploaded on 09/08/2010 for the course BUS 170 at San Jose State University .
 '08
 francis,stephen

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