1. Portfolio Returns A portfolio manager has made an investment that will genera
ID: 2762002 • Letter: 1
Question
1. Portfolio Returns
A portfolio manager has made an investment that will generate returns that are subject to the state of the economy during the year. Use the following information to calculate the standard deviation of the return distribution for the portfolio.
Economic State
Return
Probability
E(R)
Weak
13%
0.4
Var(R)
Marginal
20%
0.4
Std(R)
Strong
25%
0.2
Standard Deviation
2. Future Value
You plan to save $1,400 for the next four years, beginning now, to pay for a vacation. If you can invest it at 6 percent, how much will you have at the end of four years?
Future Value
1. Portfolio Returns
A portfolio manager has made an investment that will generate returns that are subject to the state of the economy during the year. Use the following information to calculate the standard deviation of the return distribution for the portfolio.
Economic State
Return
Probability
E(R)
Weak
13%
0.4
Var(R)
Marginal
20%
0.4
Std(R)
Strong
25%
0.2
Standard Deviation
Explanation / Answer
1. Portfolio return
Senerio Return Probability
Weak 13% 0.4
Marginal 20% 0.4
Strong 25% 0.2
The expected return of the portfolio is
= (0.13)(0.4) + (0.20)(0.4) + (0.25)(0.2) = 18.2 %
Calculate variance by computing difference in each potential return outcome from the 18.2% then squaring
Senerio probability Deviation from expected return squared
Weak 0.4 ( 13 % - 18.2%) = 0 0
Marginal 0.4 ( 20 % - 18.2%) = 1.8 3.24
Strong 0.2 ( 25% - 18.2%)= 6.8 46.24
Variance of portfolio = (0) (0.4)+(3.24) (0.4) + (46.24)(0.2)
= 0 + 1.37 + 9.25 = 10.62
Standard deviation is square root of variance hence standard deviation of the given portfolio is 3.25
2. Future value :
Given data : P = $ 1400, r= 6% i.e 0.06 , t = 4 years
A = P + I
A = P + Prt
A = P ( 1+rt)
A = $ 1400 ( 1 + (0.06)(4))
A = $1400 ( 1.24) = $ 1736
Hence I will get $ 1736 after 4 years for the amount invested now $1400
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.