An investor holds a portfolio of stocks and is considering investing in the XYZ
ID: 2713287 • Letter: A
Question
An investor holds a portfolio of stocks and is considering investing in the XYZ Company. The firm's prospects look neutral and you estimate the following probability distribution of possible returns:
How much is the expected return for XYZ? How much is the coefficient of variation for XYZ? 99.73% of the time in what range (what specific values) would you expect the returns for XYZ, using Empirical Rule. You add ABC to your portfolio; you sell 30% of XYZ to ABC. How much is your expected return for this portfolio? How much is the coefficient of variation for the new portfolio? Do you consider this portfolio more or less risky than the individual stocks? Why?
Returns on ABC P Returns on XYZ -5% 0.10 -40% 3% 0.20 -10% 8% 0.40 20% 10% 0.20 32% 12% 0.10 45%Explanation / Answer
An investor holds a portfolio of stocks and is considering investing in the XYZ Company. The firm's prospects look neutral and you estimate the following probability distribution of possible returns:
How much is the expected return for XYZ? How much is the coefficient of variation for XYZ? 99.73% of the time in what range (what specific values) would you expect the returns for XYZ, using Empirical Rule. You add ABC to your portfolio; you sell 30% of XYZ to ABC. How much is your expected return for this portfolio? How much is the coefficient of variation for the new portfolio? Do you consider this portfolio more or less risky than the individual stocks? Why?
Returns on XYZ
Returns on XYZ
Returns on XYZ - Expected Return
(Returns on XYZ - Expected Return)^2
P x (Returns on XYZ - Expected Return)^2
99.73%of the data values can be expected to lie within a three standard deviation interval around the mean, i.e. in the interval X ± 3s
An investor holds a portfolio of stocks and is considering investing in the XYZ Company. The firm's prospects look neutral and you estimate the following probability distribution of possible returns:
Returns on ABC P Returns on XYZ -5% 0.1 -40% 3% 0.2 -10% 8% 0.4 20% 10% 0.2 32% 12% 0.1 45%How much is the expected return for XYZ? How much is the coefficient of variation for XYZ? 99.73% of the time in what range (what specific values) would you expect the returns for XYZ, using Empirical Rule. You add ABC to your portfolio; you sell 30% of XYZ to ABC. How much is your expected return for this portfolio? How much is the coefficient of variation for the new portfolio? Do you consider this portfolio more or less risky than the individual stocks? Why?
a) PReturns on XYZ
Expected Return 0.1 -40% -0.04 0.2 -10% -0.02 0.4 20% 0.08 0.2 32% 0.064 0.1 45% 0.045 Expected return for XYZ 12.90% b) PReturns on XYZ
Returns on XYZ - Expected Return
(Returns on XYZ - Expected Return)^2
P x (Returns on XYZ - Expected Return)^2
0.1 -40% -52.9% 0.279841 0.0279841 0.2 -10% -22.9% 0.052441 0.0104882 0.4 20% 7.1% 0.005041 0.0020164 0.2 32% 19.1% 0.036481 0.0072962 0.1 45% 32.1% 0.103041 0.0103041 Variance 0.058089 5.81% Standard Deviation 0.241016597 24.10% coefficient of variation =SD/ Expected Return coefficient of variation= 24.10%/12.90% 1.868 c) Maximum Range99.73%of the data values can be expected to lie within a three standard deviation interval around the mean, i.e. in the interval X ± 3s
12.90% ± 3 x (24.10%) Maximum Range 13.623 Minimum Range 12.177Related Questions
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