Question

NO P Q R S Finandal Risk and Required Return بر پر بنا The expected return on a portfolio is simply a weighted average of the expected returns of the individual assets in the portfolio ت ا ج ہے Assume that all of you recently graduated and just landed a job as financial planners with Palm Clinie. Your first assignment as a gmup of new recruits is to invest $100,000. Because the funds are to be invested at the end of one year, you have hecn instructed to plan for a one-year holding period. Further, your boss has restricted you to the following investment alternatives, shown with their probabilities and associated outcomes. Portfolio Weight Expected Return Estimated Portfolio Return B Stock Alta Inds. Rope Men Recession Belon Ave State of Economy American Foam Market Portfolio Probability T-Rills Alta Inds. Repe Men Average Ahave Ary 0.1 10.0% -15.0% 14.7% Boom Recession Below Average Average Above Avery Room 0.4 0.0% 20.0% 0.0% 7,0% 15.0% 29.11% 15 Expeet Return Standard Deviation 11. 50.0% -211.0% 30.0% Coelicient of Variation 20 Barney Smith Investment Advisors recently issued estimates for the state of the conomy and the rate ofrem on each state of the conomy. Alta Industries, Inc. is an electronics firm: Repo Men Inc. collects past due dcbtsand American Foam manufactures mattresses and various other fuam products. Bamey Smith also maintains an "index Cund" which was a market-weighted fraction of 22 all publicy traded stocks you can invest in that fund and thus ahtain average stock market results. Given the situation as described 23 answer the following questions. Beta 25 26 . Suppose you create a two-stock portfolin hy investing $50,000 in Alta Industries und $80,000 in Repe Man. Calculate the expected retum, standard deviation, cncfficient of variation, and heta for this portfolio. How does the risk of this two-stock portfelle compare with the risk of the individual stocks if they were held in isolation

Answer 1

This is a question from investment portfolio management. The formula are standard.

I have produced the screenshots from my model below.

• I have populated only that much data in my excel model, that i need for this question.
• Yellow cells contain your answers.
• Adjacent Blue colored cells contain the excel formula used to get the answer.
• I have to make use of two more values: expected eturn from the market and standard deviation of the return from the market. I have calculated them in cells G17 and G18. You might have them as part of answer to some earlier sub question.
• Formula in cell L8 = 50,000 / (50,000 + 50,000) = 0.5
• Formula in cell L9 = 1 - L8

A B C D E F G H I J K L M N O P Q Stock Alta Inds. Repo Men Portfolio Weight 0.5 0.5 Expected Return Estimated Portfolio return 1.49-SUMPRODUCT(B11:B15,D11:015) Recession 3.0%'$L$8*D11+$L$9°E11 1.7%=SUMPRODUCT(B11:B15,E11:E15) Below Average 6.4% =$L$8*D12+$L$9*E12 Average -10.0%=SL$8D13+$L$9°E13 Above average 12.5%'$L$8*D14+$L$9*E14 Boom 15.0%=$L$8D15+$L$9 E15 10 State of Economy Probability 11 Recession 0.1 12 Below Average 0.2 13 Average 0.4 14 Above average 0.2 15 Boom 0.1 T-bills Alta Inds. Repo Me Ameri Market Portfolio -22.0% 28.0% -13.0961 2.0% 14.7% 1.0% 20.0% 0.0% 15.0% 35.0% -10.0% 29.0% 50.0% -20.0% 43.0% Expected Return Standard deviation 1.6% 0.1001 SUMPRODUCT(L8:L9,M8:M9) =SQRT(B11"(P8-L14)^2+B12*(P9-L14)^2+B13" (P10-L14)^2+B14"(P11-L14)^2+B15"(P12-L14)^2) SORTIB 11 (PB-114)^2+B12(Pg. 1412813 16 10.01%=L15 (Change it to %age format) Expected return from market| 15.0%'SUMPRODUCT(B11:B15,G11:515) Or Standard deviation 0.1533623 "=SQRT(B11" (G11 L G17)^2+B12" (G12- Coefficient of variatil 6.38=L15/L14 Beta 0.2161 =(B11"(P8-L14)" (G11-G17)+B12"(P9-L14)" (G12-G17)+B13" (P10-L14)*(G13-G17)+B14*(P11-L14)" (G14- G17)+B15*(P12-L14)" (G15-G17)/G1842

And the screenshot in the formula mode is: