CORPFIN 1002 Lecture Notes - Lecture 11: Risk Premium, Expected Return, Weighted Arithmetic Mean
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25 Jan 2023
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An investor holds a portfolio of stocks and is considering investing in the XYZ Company. The firm's prospects look neutral and you estimate the following probability distribution of possible returns:
Returns on ABC | P | Returns on XYZ |
-5% | 0.10 | -40% |
3% | 0.20 | -10% |
8% | 0.40 | 20% |
10% | 0.20 | 32% |
12% | 0.10 | 45% |
How much is the expected return for XYZ? How much is the coefficient of variation for XYZ? 99.73% of the time in what range (what specific values) would you expect the returns for XYZ, using Empirical Rule. You add ABC to your portfolio; you sell 30% of XYZ to ABC. How much is your expected return for this portfolio? How much is the coefficient of variation for the new portfolio? Do you consider this portfolio more or less risky than the individual stocks? Why?