Question

PowerPoint File Edit View Insert Format Format Arrange Wed Jul 29 8:32:28 PM Q Tools Slide Show Window Help *M* = 0)) 37% O Ch.11-1-3-Risk-Return-NoVoice - Saved to my Mac ООС AutoSave OFF Q Home Insert Draw Design Transitions Animations Slide Show Review View Share Comments nu v y v v Layout Reset O Section Times New Roman 16 ~ A ť po I Ų # x² x AV V Aarova Paste New Slide B Convert to SmartArt Picture TAT Arrange Quick Sensitivity Styles 1 Extra 5 points exercise Table 11.6 Race of return assumptions for two stocks 2 Table 11.8 Rates of return for two stocks and a portfolio with 75% invested in the auto stock and 25% in the gold stock Portraim (75 vouw) - (25 gold room Rate of Return (%) Rate of Return (%) Scenario Probability Auto Stock Gold Stock Scenario Probability Auto Stock Gold Stock Portfolio Return (%) 3 Recession 1/3 8 +20 Recession 1/3 -B +20 - 1.0 Normal 1/3 +5 +3 Normal 1/3 +5 -3 +4.5 Boom 1/3 +18 -20 Boom 1/3 +18 -20 +8.5 Expected return 5 1 4. Variance 112.7 269.7 15.2 Standard deviation 10.6 16.4 3.9 ???? • Show why standard deviation of portfolio is 3.9. Hint: After calculate Covariance, use SD,= v(W.2 SD, 2 +W.2 SD 2 + 2 *W, *WCova b) Slide 4 of 4 English (United States) Notes Comments E + 105%

Answer 1

Standard deviahon 2 of portfolio (wa sba? + W 2 SDE + 2 x Wax Wox Couab) where, wa wh z weight of auto stock weight of abold stock SDa z Standard deviation y Auto Stock SDb 2 Standard dwiation of Gold Shock covariance of both the stocks. Lovab= So, now lalulahon covariance ( Return of Recession of Auto Shock Expected Returng Alto Stock) x (Return of Recession of Gold Stock Gipecled Return of Gold Shock) + (Retum Normal of Auto Stock Arpicted Return of Auto stock) x ( Return of Normal of Gold stock Expected Return of Gadd stock) + (Return af Boom Auto Stock- érpected Retum of Auto Stock) x ( Return of Boom of Gold Stock - Expected Return of gold stock) 3 of CS Scanned with CamScanner

-8-54(20-1) + (5-5) x (3-1) + (18- 5)*(-20-1) 3 (13)09) + 10 (2) + (13)x(-21) 3 - 247 + 0 + 273 3 - 520 3 Now, Calulaking Standard deviation of Portfolio Standard Deviahon = of portfollo (0-75) *x (10.6)* + 10.25)*x (16.43+ 2x0.75*0.25 *-520 3 z 63.2025 + 16.81 - 65 = 15.0125 3.874596 753 OY 3.9 Note: Calutation of standard deviation of Choux Standard deviahmi x( Retumof Recessim – Gupected Retum) + X (Return Normal Supected Return)? + LY ( Return of Boom - õupected Retina)? CS Scanned with CamScanner

1*(-8-5)2 + 1 x ( 5-5)2 + 1 x(18-5)2 Standard deviation of Auto stock 3* * * *(5-5)*+L** 1 x 169 + 0 + 3 691 x 3 J112.6666667 or 112.7 10.6 (lounded off to one decimal) Standard deviation of Gold Stock Х 1 x 3 (20-1)2 + 4x (3-1)2 +1 +1*(-20-1) 2 1 x 361 + e thx & x 44] 3 268.6666667 z 268.7 116.4 (Rounded off to one diamal) CS Scanned with CamScanner