Purchase Solution

Expected Return and Standard Deviation of Return

Not what you're looking for?

Ask Custom Question

1) You are interested in investing, and are considering a portfolio comprised of the following two stocks. Their estimated returns under varying market conditions are provided:

Condition Probability of condition Return on security A Return on security B
Economy Sluggish 0.3 0.16 -0.05
Economy Normal 0.4 0.06 0.1
Economy Booms 0.3 -0.02 0.21

a) What is the expected return for security A?
b) What is the expected return for security B?
c) What is the standard deviation for Security A?
d) What is the standard deviation for Security B?

2) Now that you have calculated the standard deviations of A and B, assuming an equally weighted portfolio of each, calculate the correlation coefficient of the two stocks and use that calculation to discuss the appropriateness of holding the stocks together in a single portfolio. (hint: you must use your answers above to first calculate the covariance).
Now that you have calculated the standard deviations of A and B, assuming an equally weighted portfolio of each, calculate the correlation coefficient of the two stocks and use that calculation to discuss the appropriateness of holding the stocks together in a single portfolio. (hint: you must use your answers above to first calculate the covariance).

Purchase this Solution
Solution Summary

Questions on expected return and standard deviation of securities and portfolios have been answered.

Solution Preview

Please see the attached excel file for answers:
You are interested in investing, and are considering a portfolio comprised of the following two stocks. Their estimated returns under varying market conditions are provided:

Condition Probability of condition Return on security A Return on security B
Economy Sluggish 0.3 0.16 -0.05
Economy Normal 0.4 0.06 0.1
Economy Booms 0.3 -0.02 0.21

What is the expected return for security A?

Security A
Condition Probability Return return x Probability
Economy Sluggish 0.30 0.16 0.0480
Economy Normal 0.40 0.06 0.0240
Economy Booms 0.30 -0.02 -0.0060

1.00 0.0660

Answer: Expected return= 0.0660

What is the expected return for security B?

Security B
Condition Probability Return return x Probability
Economy Sluggish 0.30 -0.05 -0.0150
Economy Normal 0.40 0.10 0.0400
Economy Booms 0.30 0.21 0.0630

1.00 0.0880

Answer: Expected return= 0.0880

What is the standard deviation for Security A?

Security A
Condition Probability Return return x Probability Difference from mean, i.e.0.066 Difference 2 Prob x Difference 2
Economy Sluggish 0.30 0.16 0.0480 0.0940 0.008836 0.0026508
Economy Normal 0.40 0.06 0.0240 -0.0060 ...

Purchase this Solution
Free BrainMass Quizzes
Measures of Central Tendency

Tests knowledge of the three main measures of central tendency, including some simple calculation questions.

Measures of Central Tendency

This quiz evaluates the students understanding of the measures of central tendency seen in statistics. This quiz is specifically designed to incorporate the measures of central tendency as they relate to psychological research.

Terms and Definitions for Statistics

This quiz covers basic terms and definitions of statistics.

Know Your Statistical Concepts

Each question is a choice-summary multiple choice question that presents you with a statistical concept and then 4 numbered statements. You must decide which (if any) of the numbered statements is/are true as they relate to the statistical concept.

View More Free Quizzes
Related BrainMass Solutions

  • Expected return and standard deviation

    12.563%-0.175)^2X0.35) Standard deviation = 2.90% The solution explains how to calculate the expected return and standard deviation for individual securities and for a portfolio

  • Important information about Expected Return and Standard Deviation of a Portfolio

    237796 Important information about Expected Return and Standard Deviation of a Portfolio Stock A has an expected return of 12% and a standard deviation of 40%.

  • Expected return and standard deviation of a portfolio

    113173 Expected return and standard deviation of a portfolio Suppose A has an expected return of 10 percent and a standard deviation of 20 percent. Asset B has an expected return of 16 percent and a standard deviation of 40 percent.

  • Expected return,standard deviation, coefficient of variation

    Standard deviation is calculated as Standard Deviation = Square root (Sum(expected return - return)^2 X probability) Find the difference between the rate of return and expected return, take the square and multiply by the related probability.

  • Expected return, standard deviation, coefficent of variation

    Above Average 0.2 25 Strong 0.1 60 1 Calculate the stock's expected return, standard deviation, and coefficient of variation Expected Return = Sum (probability X rate of return) Expected Return = (0.1X-50% + 0.2X-5%+0.4X16%+

  • Percival Hygiene Portfolio Combinations Risk and Return

    whose expected return is 9% and standard deviation is 10% Thus the expected return can be improved and that too with the lowering of risk Calculation of expected return and standard deviation: Asset Weights (x)

  • Finance: Portfolio return and risk.

    RATE OF RETURN AND STANDARD DEVIATION Problem 13. Security A offers an expected return of 15 percent with a standard deviation of 7 percent. Security B offers an expected return of 9 percent with a standard deviation of 4 percent.

  • Expected return and standard deviation for a portfolio

    Calculate the expected return and expected standard deviation of a two stock portfolio when r1,2 = - .60 and w1 = .75. b. Calculate the expected returns and expected standard deviations of a two stock portfolio when r1,2 = .80 and w1 = .60.

  • Finding the Standard Deviation of a Portfolio Using Beta

    480899 Standard Deviation I need help with the following: Suppose that the expected return on the market is 12% and the risk free rate is 7%. The standard deviation of the return on the market is 15%.

  • Expected Return and Standard Deviation

    0.005187 Standard Deviation = Square root ( Variance) Standard Deviation = Square root (0.005187) Standard Deviation = 7.2% The solution explains the calculation of expected return and standard deviation of a stock.

View More Related Solutions