Unformatted text preview: o return in each possible state and computing the expected value as we did with individual securities Example: Expected Portfolio Example: Expected Portfolio Returns Consider the portfolio weights computed previously. If the individual stocks have the following expected returns, what is the expected return for the portfolio? DCLK: 19.65%
KEI: 8.13% E(RP) = .133(19.65) + .2(8.96) + .267(9.67) + .
4(8.13) = 10.24% Portfolio Variance
Portfolio Variance Compute the portfolio return for each state:
RP = w1R1 + w2R2 + … + wmRm Compute the expected portfolio return using the same formula as for an individual asset
Compute the portfolio variance and standard deviation using the same formulas as for an individual asset Example: Portfolio Variance
Example: Portfolio Variance Consider the following information Invest 50% of your money in Asset A State
B Boom .4
7.5% What is the expected return and standard deviation for each asset?
What is the expected return and standard deviation for the portfolio? Another Example
Another Example Consider the following information
State Boom Normal Recession Probability
10% What is the expected return and standard deviation for a portfolio with an investment of $6000 in asset X and $4000 in asset Y? Risk
Systematic Risk (market risk) Unsystematic Risk (asset specific risk) Systematic (Market) Risk
Systematic (Market) Risk R...
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This document was uploaded on 01/14/2014.
- Winter '14