Portfolio Return & Risk - Question
Portfolio Return & Risk - Question
Solution:
M Ltd. N Ltd.
Cost per share
Divdend
# of shares
M Ltd. N ltd.
Expected
return
Expected risk
Co-eff of
Variation
= SD/ mean
Home Work
spectively. Probabilities
on in each case.
Expected risk
N Ltd. σ = √ ∑ {pi [(ri – E(r) ]2 }
σ = √ ∑ {(pi*ri2) – E(r)2 }
The forecast of returns for securities A and B are laid out below.
Security A Security B
Probability Return (%) Probability Return (%)
0.05 15 0.05 8
0.2 20 0.25 18
0.5 25 0.4 26
0.2 30 0.25 34
0.05 35 0.05 44
Required:
(i) Expected rate of return of each security.
(ii) Standard deviation for each security.
(iii) Independent of the first three elements, assume now that the probability of return for security B will be identical with
(a) Expected return from the portfolio, if it is formed with 70% investment in A and
remainder in B.
(iv) Compute the risk in the 70/30 portfolio
Solution:
(i) Expected rate of return of each security
Security A Security B
Probability Return (%) Probability Return (%)
0.05 15 0.05 8
0.2 20 0.25 18
0.5 25 0.4 26
0.2 30 0.25 34
0.05 35 0.05 44
Expected Return
(iii-a) Expected return from the portfolio, if it is formed with 70% investment in A and remainder in B.
Weights
Probability Return in % (A) Return in % (B) Portfolio return
0.05 15 8
0.2 20 18
0.5 25 26
0.2 30 34
0.05 35 44
Asset expected
return
Correlation
urn for security B will be identical with that of A. Compute
(b) covariance of AB. (c) Correlation Coefficient of AB.
Security A Security B
σ of Return (A)
σ of Return (B)
COV(AB)
Expected Risk
The following is the return of two securities for the past five year Calculate for each the expected return and risk.
What will be expected Return of Portfolio Comprising 40% - X and 60% - Y. What will be the risk of the portfolio
Risk
Return of Portfolio=
Correlationof X,Y=
Risk of Portfolio=
Sqrt(Wx^2*SDx^2+Wy^2*Sdy^2+2*Wx*Wy*Sdx*Sdy*r)
turn and risk.
he portfolio
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Weights
The following is the forecast of return of two securities along with the probability of their occurrence. Calculate the expected
return and risk of both the securities. Find correlation between Returns of X & Y.
P*(X-E(X)) (Y-
Probability Return (X) Return(Y) X-E(X) Y-E(Y) P*(X-E(X))^2
E(Y))
0.05 10 18
0.2 20 12
0.5 20 28
0.2 25 28
0.05 25 38
If a portfolio comprise of 30% - X & 70% - Y, Find Expected Return, S.D. of portfolio.
Solution
Expected
Return
Risk
Corrrelation
Port. σ W1 W2
rence. Calculate the expected
P*(Y-E(Y))^2
Home Work
Mr. X is holding two securities X and Y in his portfolio. With the details given below calculate the portfolio risk and return.
Standard
Security Proportion Return
Deviation
X 0.6 10 20
Y 0.4 16 25 Home work
Correlation of the securities return is 0.50.
Soltuion
Portfolio Return
Portfolio SD
ate the portfolio risk and return.