You work as an economic analyst for an investment firm. You believe there are four possible states for the economy over the next year: Boom, Good, Poor, Bust. Your colleague Tosha has estimated the returns for three stocks based on those four scenarios. One of your clients has a portfolio that is 20.00% invested in Stock A and 30.00% invested in Stock C. The rest of your client's portfolio is invested in Stock B. Use the information below to calculate the expected return, variance, and standard deviation on your client's portfolio. 1. First fill in the missing probability and portfolio weight (cells D19 and F22). 2. Calculate the actual return for the portfolio in each state. 3. Use those portfolio returns and the probabilities to calulcate the portfolio's expected return using the SUMPRODUCT function. 4. Calculate the squared deviation from the mean for each state of the economy. 5. Use the SUMPRODUCT function to get the variance (the probability weighted average of the squared deviations). 6. Use the POWER function to convert the variance into the standard deviation. 19 points State Probability Stock A Stock B Stock C Boom 0.15 35% 40% 28% Good 0.35 16% 17% 9% Poor 0.30 -1% -3% 1% Bust 0.20 -10% -12% -9% Stock A Stock B Stock C portfolio weights 20% 50% 30% Probability Portfolio Return Squared Deviation Boom 0.15 Good 0.35 Poor 0.30 Bust 0.20 Portfolio E(R) Portfolio Variance Portfolio Standard Deviation|
You work as an economic analyst for an investment firm. You believe there are four possible states for the economy over the next year: Boom, Good, Poor, Bust. Your colleague Tosha has estimated the returns for three stocks based on those four scenarios. One of your clients has a portfolio that is 20.00% invested in Stock A and 30.00% invested in Stock C. The rest of your client's portfolio is invested in Stock B. Use the information below to calculate the expected return, variance, and standard deviation on your client's portfolio. 1. First fill in the missing probability and portfolio weight (cells D19 and F22). 2. Calculate the actual return for the portfolio in each state. 3. Use those portfolio returns and the probabilities to calulcate the portfolio's expected return using the SUMPRODUCT function. 4. Calculate the squared deviation from the mean for each state of the economy. 5. Use the SUMPRODUCT function to get the variance (the probability weighted average of the squared deviations). 6. Use the POWER function to convert the variance into the standard deviation. 19 points State Probability Stock A Stock B Stock C Boom 0.15 35% 40% 28% Good 0.35 16% 17% 9% Poor 0.30 -1% -3% 1% Bust 0.20 -10% -12% -9% Stock A Stock B Stock C portfolio weights 20% 50% 30% Probability Portfolio Return Squared Deviation Boom 0.15 Good 0.35 Poor 0.30 Bust 0.20 Portfolio E(R) Portfolio Variance Portfolio Standard Deviation|
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:You work as an economic analyst for an investment firm. You believe there are four possible states for the
economy over the next year: Boom, Good, Poor, Bust. Your colleague Tosha has estimated the returns for three
stocks based on those four scenarios. One of your clients has a portfolio that is 20.00% invested in Stock A and
30.00% invested in Stock C. The rest of your client's portfolio is invested in Stock B. Use the information below to
calculate the expected return, variance, and standard deviation on your client's portfolio.
1. First fill in the missing probability and portfolio weight (cells D19 and F22).
2. Calculate the actual return for the portfolio in each state.
3. Use those portfolio returns and the probabilities to calulcate the portfolio's expected return using the SUMPRODUCT function.
4. Calculate the squared deviation from the mean for each state of the economy.
5. Use the SUMPRODUCT function to get the variance (the probability weighted average of the squared deviations).
6. Use the POWER function to convert the variance into the standard deviation.
19 points
State
Probability
Stock A
Stock B
Stock C
Boom
0.15
35%
40%
28%
Good
0.35
16%
17%
9%
Poor
0.30
-1%
-3%
1%
Bust
0.20
-10%
-12%
-9%
Stock A
Stock B
Stock C
portfolio weights
20%
50%
30%
Probability
Portfolio
Return
Squared
Deviation
Boom
0.15
Good
0.35
Poor
0.30
Bust
0.20
Portfolio E(R)
Portfolio Variance
Portfolio Standard Deviation|
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