Question

Computing the expected rate of return and risk Aber a tumous period in the stock market Logan Morgan is considering an veter in one of the portions Given the normation that w based on risk measured by the standard deviation and retums measured by the expected of Question Help hich invest Portfolio A Probability Return Portfolio Probability Return a. The expected rate of rebum for portfoo As 17%. Round to we decimal places) The standard deviation of poroo A Found to two decimal places)

compute standard dev of portfoilio A

compute expected rate of return for B

compute standard dev of B

Answer 1

Solution: Calculation of Mean and Standard Deviation of Portfolio A.

Probability	Portfolio A's Return %	Probability x Portfolio A's Return	Portfolio A's Return - Mean of Returns	(Portfolio A's Return - Mean of Returns) ^ 2	Probability x (Portfolio A's Return - Mean of Returns) ^ 2
0.15	-4	-0.6	-21	441	66.15
0.5	17	8.5	0	0	0
0.35	26	9.1	9	81	28.35
	Mean of Returns	17			94.5

Variance of Portfolio A = ∑ Probability x (Portfolio A's Return - Mean of Returns) ^ 2

                                       = 94.5

Standard Deviation of Portfolio A = Variance ^ (1/2)

                                      = 94.5 ^ (1/2)

                                      = 9.72%

Calculation of Mean and Standard Deviation of Portfolio B.

Probability	Portfolio B's Return %	Probability x Portfolio B's Return	Portfolio B's Return - Mean of Returns	(Portfolio B's Return - Mean of Returns) ^ 2	Probability x (Portfolio B's Return - Mean of Returns) ^ 2
0.12	4	0.48	-6.12	37.4544	4.4945
0.32	10	3.2	-0.12	0.0144	0.0046
0.42	10	4.2	-0.12	0.0144	0.0060
0.14	16	2.24	5.88	34.5744	4.8404
	Mean of Returns	10.12			9.35

Variance of Portfolio B = ∑ Probability x (Portfolio B's Return - Mean of Returns) ^ 2

                                       = 9.35

Standard Deviation of Portfolio B = Variance ^ (1/2)

                                      = 9.35 ^ (1/2)

                                      = 3.06%