Question

Assignment#3, FIN 420 Spring 2019 Pagel 5 5. (15 points) You have forecasted the returns for Q00 (Nasdaq-100) and PWR stocks under different scenarios as below State of the economy Probability of the state of the economy 0.40 0.50 0.10 Returns PWR -20% 30% 80% Recession Normal Boom -10% 20% 40% If your portfolio consists of $800 worth of QQQ and $1,200 worth of PWR, what is your portfolio's expected return? a. Expected return Calculate correlation between QQQ and PWR. Interpret the number. b. Calculation Interpretation What is the portfolio's standard deviation based on weights of the securities in a.? c.

Answer 1

Returns State Recession Normal Boom Probability Qga PWR 10% 0.4 0.5 0.1 30% 80% Calculation of Expected Return: Expected return is given by following formula: 10 Expected return(r)- 12 14 15 16 17 Expected return of oga -Sum of product of probability and return in each state :0.4*-10%+0.5*20%+0.1*40% 10.00% :SUMPRODUCT(D4:D6,E4:E6) Hence expected return of QQQ is 10.00% 19 Simillarly expected return for PWR can be calculated as follows: Expected return of PWR 15.00% :SUMPRODUCT(D4:D6,F4:F6 PWR 24 Expected Return 10.00% 15.00% 26 27 Calculation of variance and standard deviation of stocks: Variance and standard deviation of stocks can be calculated as follows: Variance and standard deviation of stocks can be calculated from following formula: 29 31 ariance Can- 2P,Gi 32 Standard Deviation (σ)-,Σ p,0,-r)2 35 36 Variance of QqQ -Sum of product of probability and square of excces return in each state 38 3.00% :SUMPRODUCT(D4:D6,E4:E6-D25)"2) 39 Standard Deviation of QQQ is 41 42 43 -Sqrt (Variance 17.32%-SQRT(D39) Simillarly Variance and Standard deviation of Stock B and Calculated: PWR Expected Return Variance Standard Deviation 10.00% 3.00% 17.32% 15.00% 10.25% 32.02% 47 49