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Rates of return and probabilities

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Managerial Finance
Week 4 Dropbox Chapter 6

Stock X a) b) Stock Y a) b)
Probability Return Rate/Return Stand Dev Probability Return Rate/Return Stand Dev
0.1 -0.1 0.2 0.02 0.4
0.2 10 0.2 7 1.4
0.4 15 0.3 12 3.6
0.2 20 0.2 15 3
0.1 40 0.1 16 1.6

Probability Return Rate/Return
0.4 15

c) Which stock is Riskier and why?

Security X Security Y
Expected return 0.1 0.07
standard deviation of returns 0.08 0.04
BETA 1.1 0.75

a) if 40% of funds in Security X and 60% in Y and coorrelation of returns between x and y is +0.5, what is:
i) the expected return from the porfolio
ii) The standard devitation of returns from the portfolio

b) what happens to the expected return and standard deviation of returns of the portfolio in part a if 70% of funds
are invested in Security x and 30% of funds in Security Y?

C) what happens to the expected return and standard deviation of returns of the portfolio in part a if the following exist?
i) correlation of returns between x and y is +1.0
ii) correlation of returns between x and y is 0
iii) correlation of returns between x and y is -0.7

Expected Standard Percent
Security Return Deviation Beta Invested (w)
Xerox 0.15 0.045 1.2 0.35
Kodak 0.12 0.038 0.98 0.65

a) which stock is riskier in a portfolio? Individually?

b) Compute the expected return on the portfolio

c) if correlation of +0.60 compute the standard deviation of the portfolio

d) compute the beta portfolio

Rate of Return

American Electrical Power
Appke Computer
eBay
Southwest Airlines

real rate of interest 3%, expected long term annual inflation 7%

a)current risk rate of return on 1 year T bill
b)
c)
d)

Security A Sec B
expected rate 0.15 0.09
stand dev 0.07 0.04

coorrelation is +0.6
if 1/4 of wealth in A and 3/4 in B what is the expected return and stand dev of this portfolio?

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