Statistical measures of standalone risk Risk and the probabilities event occurre

Question

Statistical measures of standalone risk Risk and the probabilities event occurrence vary under different circumstances. To identify an average expected return under a range of different possible outcomes, calculate the expected value of a range of possible outcomes. The expected value or return is a statistical measure of the average (mean) value of all possible outcomes. Consider this case: Ethan owns a two-stock portfolio that invests in Falcon Freight Company (FF) and Pheasant Pharmaceuticals (PP). Three-quarters of Ethan's portfolio value consists of Falcon Freight's shares, and the balance consists of Pheasant Pharmaceuticals's shares. Each stock's expected return for the next year will depend on forecasted market conditions. The expected returns from the stocks in different market conditions are detailed in the following table: Calculate expected returns for the individual stocks in Ethan's portfolio as well as the expected rate of return of the entire portfolio over the three possible market conditions next year. The expected rate of return on Falcon Freight's stock over the next year is The expected rate of return on Pheasant Pharmaceuticals's stock over the next year is The expected rate of return on Ethan's portfolio over the next year is The expected returns for Ethan's portfolio were calculated based on three

Explanation / Answer

Solution :

Falcon Freight

a

b

c

D

Market condition

Probability (p)

return (r)

P xr (i.e mean)

strong

0.25

0.3

0.075

normal

0.45

0.18

0.081

weak

0.3

-0.24

-0.072

0.0840

expected rate of return = 8.40%

Pheasant Pharmaceuticals

a

b

c

d

Market condition

Probability (p)

return (r)

P xr (i.e mean)

strong

0.25

0.42

0.105

normal

0.45

0.24

0.108

weak

0.3

-0.3

-0.09

0.1230

expected rate of return = 12.30%

Falcon Freight

Pheasant Pharmaceuticals

Expected Return of Ethan Portfolio

Expected Return

8.40%

12.30%

weight

75.00%

25.00%

6.30%

3.08%

9.38%

Falcon Freight

a

b

c

D

Market condition

Probability (p)

return (r)

P xr (i.e mean)

strong

0.25

0.3

0.075

normal

0.45

0.18

0.081

weak

0.3

-0.24

-0.072

0.0840

expected rate of return = 8.40%

Pheasant Pharmaceuticals

a

b

c

d

Market condition

Probability (p)

return (r)

P xr (i.e mean)

strong

0.25

0.42

0.105

normal

0.45

0.24

0.108

weak

0.3

-0.3

-0.09

0.1230

expected rate of return = 12.30%

Falcon Freight

Pheasant Pharmaceuticals

Expected Return of Ethan Portfolio

Expected Return

8.40%

12.30%

weight

75.00%

25.00%

6.30%

3.08%

9.38%

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