7UIUC%20FIN%20300%20Portfolio%20Expected%20Return%20page%2073%20808-1%20FA09

# 7UIUC%20FIN%20300%20Portfolio%20Expected%20Return%20page%2073%20808-1%20FA09

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UNIVERSITY OF ILLINOIS College of Business - Department of Finance - Finance 300 (Financial Markets) Professor James Jackson Constructing a Portfolio Using Covariance & Correlation (Page 73 Example) Stock Fund Scenario P r s P * r s r s - E ( r) s P * [(r s - E ( r) s )] 2 Boom 0.25 30.00 7.50 19.000 90.250 Normal 0.50 12.00 6.00 1.000 0.500 Bust 0.25 -10.00 -2.50 -21.000 110.250 E ( r) s 11.00 ∑ P * [(r s - E ( r))] 2 = σ 2 201.000 σ s 14.177 Bond Fund Scenario P r b P * r b r b - E ( r) b P * [(r b - E ( r) b )] 2 Boom 0.25 -2.00 -0.50 -6.000 9.000 Normal
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Unformatted text preview: 0.50 5.00 2.50 1.000 0.500 Bust 0.25 8.00 2.00 4.000 4.000 E ( r) b 4.00 ∑ P * [(r b- E ( r))] 2 = σ 2 13.500 σ b 3.674 Portfolio Consisting of Stocks and Bonds Scenario P r s * r b (r s * r b ) * P [r s - E ( r) s ] * [r b- E ( r) b ] P * {[r s- E ( r) s ] * [r b- E ( r) b ]} Boom 0.25-60-15-114-28.5 Normal 0.50 60 30 1 0.5 Bust 0.25-80-20-84-21 E ( r) s,b = ∑-5.00 COV s,b = ∑-49.00 ρ = COV s,b / ( σ s σ b )-0.94066...
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