Question

PLEASE ANSWER ASAP. I WILL RATE!!

Woodpecker, Inc., stock has an annual return mean and standard deviation of 19 percent and 21 percent, respectively. What is the percentage smallest expected loss in the coming month with a probability of 2.5 percent? (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Round the 2-score value to 3 decimal places when calculating your answer. Enter your answer as a percent rounded to 2 decimal places.)

Answer 1

Smalles Expected Loss:

A B с 1 2 Return Mean 3 Standard Deviation 4 Probability 19% 21% Given in question 2.50% 5 6 Smallest Expected Loss 7 -22.16% =NORM.INV(B4,B2,B3)

Smallest Expected Loss = -22.16%

Workings:

Excel formula NORM.INV is used to solve as follows:

Function Arguments ? x NORM.INV = 0.025 Probability B4 Mean B2 Standard_dev B3 = 0.19 1 = 0.21 = -0.221592437 Returns the inverse of the normal cumulative distribution for the specified mean and standard deviation. Probability is a probability corresponding to the normal distribution, a number between 0 and 1 inclusive. Formula result = -22.16% Help on this function OK Cancel

Sharpe Ratio:

A B C D Reference RF 4 1 2 Steps Particulars 3 Risk Free return Asset A expected return 5 Asset B expected return 6 Asset A standard deviation 7 Asset B standard deviation Correlation 9 Risk Premium on Stock Fund 1 10 Risk Premium on Bond Fund Covariance of stock and bond funds Values 5.00% 12.00% 23.00% 17.00% 33.00% 0.2500 7.00% 18.00% 00 11 2 0.0140 ER(A) ER(B) SD(A) sc(B) Cor RF(A) = ER(A)-RF RF(B) = ER(B)-RF Cov = SD(A) *SD(B)*Cor W(A) = (RF(A)*SD(B)^2)- (RF(B) *Cov))/((RF(A) *SD(B)^2)+(RF(B)*SD(A)^2)- ((RF(A) +RF(B)) *Cov) W(B) = 1-W(A) ER(P) = W(A)*ER(A)+W(B)*ER(B) SD(P) = ((W(A)^2*SD(A)^2)+(W(B)^2*SD(B)^2)+(2*Cov*W(A) *W(B)))^(1/2) (ER(P)-RF)/SD(P) 3 12 13 Investment propotion in Stock Investment propotion in Bond Expected Return of Portfolio 54.71% 45.29% 16.98% 14 4 5 Standard Deviation of Portfolio 15 0.195 16 6 Sharpe Ratio of the best feasible CAL 0.6152

Optimal Sharpe Ratio in a portfolio of two assets = 0.6152

Workings:

A B D 1 2 Steps 3 4 5 6 7 8 9 Particulars Values Risk Free return 0.05 Asset A expected return 0.12 Asset B expected return 0.23 Asset A standard deviation 0.17 Asset B standard deviation 0.33 Correlation 0.25 Risk Premium on Stock Fund =D4-D3 Risk Premium on Bond Fund =D5-D3 Covariance of stock and bond funds =D8*D6*D7 Investment propotion in Stock =((D9*D7^2)-(D10*D11)/((D9*D7^2)+(010*D6^2)-((D9+D10) *D11)) Investment propotion in Bond =1-D12 Expected Return of Portfolio =SUMPRODUCT(D12:013,D4:05) Standard Deviation of Portfolio =((D12^2*D6^2)+(D13^2*D7^2)+(2*D11*D12*D13))^(1/2) Sharpe Ratio of the best feasible CAL =(D14-D3)/D15 10 1 11 2 12 13 3 14 4 15 5 16 6 17