An investor holds a portfolio of stocks and is considering investing in the DBB

Question

An investor holds a portfolio of stocks and is considering investing in the DBB Company. The firm's prospects look neutral and you estimate the following probability distribution of possible returns: How much is the expected return for DBB? How much is the coefficient of variation for DBB? 99.73% of the time in what range (what specific values) would you expect the returns for DBB? Use the Empirical Rule. Now let's say you want to add another asset, DVI, to your portfolio. You sell 30% of DBB pun base DVI. 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? Explain

Explanation / Answer

Answer:a) 12.9%

Answer:b) Coefficient of variation=S.D/Mean

Variation=

S.D=square root of 5.8089%

=2.410

COV=2.410/12.9=0.1868

Answer:d) Expected return on DVI:=6.5%

Expected return on the portfolio=6.5%*0.30+12.9%*0.70

=10.98%

Answer:e) COV=Sd portfolio/Mean portfolio

Sd DVI=Square root of 0.2205

=0.46095%

Sd portfolio=0.46095*0.30+2.410%*0.7

=1.825%

COV=1.825/10.98=0.166

Answer:f) It is more risky.because Coefficient of variance is less.

Return on DBB P Expected return -40% 0.1 -0.04 -10% 0.2 -0.02 20% 0.4 0.08 32% 0.2 0.064 45% 0.1 0.045 0.129

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