Risk and Return Expected Return and Variance Expected

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Risk and Return Expected Return and Variance

Risk and Return Expected Return and Variance

Expected Return State of Probability of Stock Returns if State Economy State of Economy

Expected Return State of Probability of Stock Returns if State Economy State of Economy Occurs Stock A Stock B Boom 50% 0. 70 0. 10 Recessio 50% -0. 20 0. 30 n Which one would you like?

Expected Return •

Expected Return •

Stock A and B •

Stock A and B •

Problem 11 -6 Calculating Expected Return Consider the following information: State of Probability of

Problem 11 -6 Calculating Expected Return Consider the following information: State of Probability of Econom State of y Economy Recessi 0. 22 on Normal 0. 48 Boom 0. 30 Calculate the expected return. Stock Returns if State Occurs -0. 12 0. 14 0. 33

How Volatile Stock Return Is? • Variance measures the average squared difference between the

How Volatile Stock Return Is? • Variance measures the average squared difference between the actual returns and the expected return • Standard deviation is the square root of variance • The larger the variance or standard deviation is, the more spread out the returns will be

Variance and Standard Deviation •

Variance and Standard Deviation •

Variance Stock A

Variance Stock A

Problem 11 -7 Calculating Standard Deviation Consider the following information: State of Probability of

Problem 11 -7 Calculating Standard Deviation Consider the following information: State of Probability of Stock Returns if State Economy State of Economy Occurs Stock A Stock B Boom 0. 24 0. 055 -0. 34 Normal 0. 64 0. 135 0. 24 Recessio 0. 12 0. 230 0. 47 n Calculate the expected return and standard deviation for two stocks

Portfolio •

Portfolio •

If We Invest on A and B… •

If We Invest on A and B… •

Problem 11 -1 Determining Portfolio Weights What are the portfolio weights for a portfolio

Problem 11 -1 Determining Portfolio Weights What are the portfolio weights for a portfolio that has 150 shares of Stock A that sell for $87 per share and 125 shares of Stock B that sell for $94 per share?

Portfolio Expected Return •

Portfolio Expected Return •

Portfolio Expected Return Suppose we had following investments: Security Amount Invested Expected Return Stock

Portfolio Expected Return Suppose we had following investments: Security Amount Invested Expected Return Stock A 1, 000 8% Stock B 2, 000 12% Stock C 3, 000 15% Stock D 4, 000 18% • What is the expected return of this portfolio?

Portfolio Expected Return

Portfolio Expected Return

Problem 11 -4 Portfolio Expected Return You have $13, 000 to invest in a

Problem 11 -4 Portfolio Expected Return You have $13, 000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 15% and Stock Y with an expected return of 9%. Assume your goal is to create a portfolio with an expected return of 12. 35%. How much money will you invest in Stock X and Stock Y?

Portfolio Variance and Standard Deviation If we invest $200 on stock A and invest

Portfolio Variance and Standard Deviation If we invest $200 on stock A and invest $800 on B, what is the portfolio variance? State of Probability of Stock Returns if State Economy State of Economy Occurs Stock A Stock B Boom 50% 0. 70 0. 10 Recessio 50% -0. 20 0. 30 n

Portfolio Variance and Standard Deviation

Portfolio Variance and Standard Deviation

Problem 11 -9 Portfolio Variance Consider the following information: State of Probabilit Econom y

Problem 11 -9 Portfolio Variance Consider the following information: State of Probabilit Econom y of State y of Economy Boom 0. 67 Bust 0. 33 Stock Returns if State Occurs Stock A Stock B Stock C 0. 10 0. 24 0. 04 0. 30 0. 35 -0. 15 What is the variance of a portfolio invested 22 percent each in A and B and 56 percent in C?