Academic Integrity: tutoring, explanations, and feedback — we don’t complete graded work or submit on a student’s behalf.

1. Portfolio Returns A portfolio manager has made an investment that will genera

ID: 2762002 • Letter: 1

Question

1. Portfolio Returns

A portfolio manager has made an investment that will generate returns that are subject to the state of the economy during the year. Use the following information to calculate the standard deviation of the return distribution for the portfolio.

Economic State

Return

Probability

E(R)

Weak

13%

0.4

Var(R)

Marginal

20%

0.4

Std(R)

Strong

25%

0.2

Standard Deviation

2. Future Value

You plan to save $1,400 for the next four years, beginning now, to pay for a vacation. If you can invest it at 6 percent, how much will you have at the end of four years?

Future Value

1. Portfolio Returns

A portfolio manager has made an investment that will generate returns that are subject to the state of the economy during the year. Use the following information to calculate the standard deviation of the return distribution for the portfolio.

Economic State

Return

Probability

E(R)

Weak

13%

0.4

Var(R)

Marginal

20%

0.4

Std(R)

Strong

25%

0.2

Standard Deviation

Explanation / Answer

1. Portfolio return

Senerio Return Probability

Weak 13% 0.4

Marginal 20% 0.4

Strong 25% 0.2

The expected return of the portfolio is

= (0.13)(0.4) + (0.20)(0.4) + (0.25)(0.2) = 18.2 %

Calculate variance by computing difference in each potential return outcome from the 18.2% then squaring

Senerio probability Deviation from expected return squared

Weak 0.4 ( 13 % - 18.2%) = 0 0

Marginal 0.4 ( 20 % - 18.2%) = 1.8 3.24

Strong 0.2 ( 25% - 18.2%)= 6.8 46.24

Variance of portfolio = (0) (0.4)+(3.24) (0.4) + (46.24)(0.2)

= 0 + 1.37 + 9.25 = 10.62

Standard deviation is square root of variance hence standard deviation of the given portfolio is 3.25

2. Future value :

Given data : P = $ 1400, r= 6% i.e 0.06 , t = 4 years

A = P + I

A = P + Prt

A = P ( 1+rt)

A = $ 1400 ( 1 + (0.06)(4))

A = $1400 ( 1.24) = $ 1736

Hence I will get $ 1736 after 4 years for the amount invested now $1400