class10-11-oct-2004-portfoliomath(6slides)

# class10-11-oct-2004-portfoliomath(6slides) - Todays plan...

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1 class #10 page 1 Portfolio Math class #10 class #10 page 2 Today’s plan Expected returns Portfolios Covariance Portfolio variance class #10 page 3 Expected returns • ( true or false ??? ) Talking about the expected return on a stock is the same as talking about the price of the stock today • Suppose you have a company that will exist for one (1) more year – at the end of the year, the company will wrap-up operations and make a final dividend payment – we (the market) expect that payment to be \$1,000 in one year class #10 page 4 Expected returns (2) • We (the market) expect the only payment to be \$1,000 in one year • If we are willing to pay \$872.14 for the stock today , that is the same as saying we expect at return of 14.66% for holding the stock • If we pay \$912.88 today, the expected return is 9.54% • How are we calculating the expected returns ? 1 today price 000 , 1 \$ 1 PV FV r r 1 FV PV = = + = class #10 page 5 Expected returns (3) • We can now make statements such as: []↓ r E P 0 []↑ r E P 0 • After September 11, 2001, the price of most stocks fell • Part of the drop came from reduced profit forecasts • Part of the drop came from the fact that the return demanded by the market for holding stock went up (systematically) class #10 page 6 Portfolio management • Pretend you are a portfolio manager • You have \$1,000,000 to invest • You put all your money in an S&P 500 index fund • If the S&P goes down 4% next month, how much money will you have ? • If it goes up 6% in the second month, how much money will you have ?

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2 class #10 page 7 Portfolio management (2) 1,046,191 0.1% 1,045,146 mar 1,045,146 2.1% 1,023,650 feb 1,023,650 -0.5% 1,028,794 jan 1,028,794 +1.1% 1,017,600 dec 1,017,600 +6.0% 960,000 nov 960,000 -4.0% 1,000,000 oct \$1,000,000 sept ending \$ return starting \$ month class #10 page 8 Portfolio management (3) • How can we calculate the historical (monthly) return of your portfolio? • How can we calculate the historical (monthly) variance of your portfolio ? • How can we calculate (or estimate) the expected monthly return of your portfolio ? • How can we calculate (or estimate) the expected monthly variance of your portfolio ?
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## This note was uploaded on 12/06/2011 for the course UGBA 103 taught by Professor Berk during the Fall '07 term at University of California, Berkeley.

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class10-11-oct-2004-portfoliomath(6slides) - Todays plan...

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