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NAME ROLL NO.
14 30 09 28
Return On Portfolio
Stock ABC
Return % Probability Expected Return 11 or 17 0.5 each return 14
Stock XYZ
20 or 8 0.5 each return 14
Variance
36
6
Standard deviation 3
ABC expected return: .5 x 11+ .5x17= 14 XYZ expected return: .5 x 20+ .5x8= 14 ABC variance = .5(11-14) + .5(17-14) = 9 XYZ variance= .5(20-14) + .5(8-14) = 36 ABC standard deviation= 3 XYZ standard deviation= 6
Now ABC and XYZ have same expected return of 14 % but XYZ stock is much more risky as compared to ABC because the standard deviation is much more high. Suppose the investor holds 2/3 of ABC and 1/3 of XYZ the return can be calculated as follows: Rp=X R Rp= return form portfolio X= proportion of total security invested in security 1. R= expected return of security 1.
In both the cases the investor stands to gain if the worst occurs, than by holding either of security individually Holding two securities may reduce portfolio risk too.
12
= covariance of X12
1 2
n
Example :
Return % Probability Stock ABC 11 or 17 0.5 each return Stock XYZ 20 or 8 0.5 each return
14 9 3
14 36 6
Solution :
n
covariance of X12 = 1 (R1 R1) . (R2 R2) 2 i=1 = 1 [(11-14)(20-14) + (17-14)(18-14)] 2 = -18
12
= covariance of X12
1 2
= -18/ (3 X 6) = -1
LIMITATIONS
CONCLUSION