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Using a statistical approach for portfolio selection.

An investor has a certain amount of money available to invest now. Three alternative portfolio selections are available. The estimated profits of each portfolio under each economic condition are indicated in below table:

Portfolio Selection

Event A B C
Economy decline $ 500 -$2,000 -$7,000
No Change 1,000 2,000 - 1,000
Economy Expand 2,000 5,000 20,000

On the basic of his own past experience, the investor assigns the following probabilities to each economic condition:

P (economy decline) = .30
P (no change) = .50
P (economy expands) =.20
a) Determine the best portfolio selection for the investor according to expected monetary value criterion. Discuss

b) Compute the standard deviation for each possible portfolio selection.

c) Compute the expected opportunity loss(EOL) for portfolio A,B, and C

d) Explain the meaning of the expected value of perfect information (EVPI) in this problem

e) Compute the coefficient of variation for portfolios A,B, and C

f) Compute the return to risk ratio for portfolios A,B, and C

g) On the basis of results of (e) and (f), which would you choose portfolio A, B, and C? Why?

h) Compare the result of (a) and (g), and explain any differences

i) Suppose the probabilities of the different economic condition were as follows:

(1) .1, .6, and .3 (3) .4, .4 and, .2
(2) .1, .3, and .6 (4) .6, .3, and, .1

Do (a) - (g) with each of these sets of probabilities and compare the results with
those obtained in (h). Discuss


Solution Summary

In the following problem statistical methods are employed for portfolio selection. several statical properties are computed in Excel and explained in a word document. Formulas are provided as well.