Stat 104 Section 2 - Problem Solutions

Stat 104 Section 2 - Problem Solutions - Stat 104 Section...

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Unformatted text preview: Stat 104 Section Notes 2 Problem Solutions Practice Problems 1) One recommended portfolio has 40% of its value in T-bills and 60% of its value in stocks. At the beginning of the year, the rate of return on this portfolio for the next year is unknown (appears random). Let's start by defining some variables: X = unknown one year rate of return on T-bills Y = unknown one year rate of return on stocks R = rate of return in the portfolio: thus, R = 0.4(X) + 0.6(Y) From past results, we can assume the following: = 5.2% s X = 2.9%, = 13.3% s Y = 17.0% r XY = –0.1 a) What is the coefficient of variation for these T-bills? Of stocks? b) What is the expected return on this investment? c) What is the risk (sd) on this investment portfolio? d) What is the coefficient of variation for this investment portfolio? e) What would happen to the risk if the correlation was 0.1? How about -0.5? Look at Var(portf) formula: If the correlation were 0.1, the risk would increase. If the correlation were -0.5, the risk Look at Var(portf) formula: If the correlation were 0....
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This note was uploaded on 03/27/2012 for the course STATS 104 taught by Professor Michaelparzen during the Fall '11 term at Harvard.

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Stat 104 Section 2 - Problem Solutions - Stat 104 Section...

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