ASIGNMENT NO: 2

Name:

Mohammad Abdullah

Enrollment:

2010-E-37

Class:

MBA (6th quarter)

Course:

Investment Analysis.

Topic:

Portfolio theory.

Submitted To:

Mrs. Noureen Iqbal Khan

Submission Date:

14-11-2012

INSTITUTE OF MANAGEMENT SCIENCES UNIVERSITY OF

BALUSHISTAN QUATTA

The two key components Risk & Return.

14/11/2012

Problem 7-1
Formula:

Where
ER = the expected return on a security
Ri =the ith possible return
pri = the probability of the ith return
M= the number of possible return
Probability
0.15
0.20
0.40
0.10
0.15

Possible Return

Expected Return

0.20 =
0.16 =
0.12 =
0.05 =
-0.05 =

0.030
0.032
0.048
0.005
-0.0075
.1075

Or 10.75% = Expected return

To calculate the standard deviation for General Foods, we will use the formula
Formula:

( )

Where
ER = the expected return on a security
Ri =the ith possible return
pri = the probability of the ith return
M= the number of possible return
= the variance of the portfolio

2 GF = [(.20-.1075)2.15] + [(.16-.1075)2.20] + [(.12-.1075)2.40] + [(.05-.1075)2.10] + [(-.05

.1075)2.15]
= .00128 + .00055 + .00006 + .00033 + .00372
= .00594
Since i = (i2) 1/2
The for GF = (.00594)1/2 = .0771 = 7.71%

Prepared By Mohammad Abdullah Shah Bukhari

Institute Of Management Sciences University Of Balochistan Quetta

The two key components Risk & Return.

14/11/2012

Problem 7-2
Formula:
(

( )

Where
E (Rp) = the expected return on a portfolio
E (Ri) = the expected return on the ith security
wi =the portfolio weight for the ith security
wi =1.0
pri = the probability of the ith return
n= the number of different securities in the portfolio

(a) (.25)(15) + (.25)(12) + (.25)(30) + (.25)(22) = 19.75%

(b) (.10)(15) + (.30)(12) + (.30)(30) + (.30)(22) = 20.70%
(c) (.10)(15) + (.10)(12) + (.40)(30) + (.40)(22) = 23.50%

Prepared By Mohammad Abdullah Shah Bukhari

Institute Of Management Sciences University Of Balochistan Quetta

The two key components Risk & Return.

14/11/2012

Problem 7-3
(
(a)

(1)

)(

)(

Variance = (1/3)2 (10)2 + (1/3)2 (8)2 + (1/3)2 (20)2 + (2) (1/3) (1/3) (.6) (8) (10) +

(2) (1/3) (1/3) (.2) (20) (10) + (2) (1/3) (1/3) (-1) (20) (8)
Variance = 11.089 + 7.097 + 44.360+ 10.645+ 8.871- 35.485
Variance = 46.577
= 6.82%
(2)

Variance = (.5)2(8)2 + (.5)2(20)2 + 2(.5) (.5) (-1) (20) (8)

= 16 + 100 - 80
= 36
= 6%

(3)

Variance = (.5)2(8)2 + (.5)2(16)2 + 2(.5) (.5) (.3) (8) (16)

= 16 + 64 + 19.2
= 99.2
= 9.96%

(4)

Variance = (.5)2 (20)2 + (.5)2 (16)2 + 2(.5) (.5) (8) (20) (16)
= 100 + 64 + 128
= 292
= 17.09%

Variance = (.4)2(8)2 + (.6)2(20)2 + 2(.6) (.4) (-1) (8) (20)

= 10.24 + 144 - 76.8
= 77.44
= 8.8%
(2)
Variance = (.6)2(8)2 + (.4)2(20)2 + 2(.6) (.4) (-1)(8)(20)
= 23.04 + 64 - 76.8
= 10.24
= 3.2%
(C) in part (a), the lowest risk portfolio is 50% of the portfolio in B and 50% in C. But this may
not be the highest return. For the combinations in (a) above, the return/risk combinations
are:
Portfolio
ER
SD
(1) A, B, C
19%
6.82%
(2) B&C
21%
6.00%
(3) B&D
17%
9.96%
(4) C&D
26%
17.09%
Combination (BC) is clearly preferable over (ABC) and (BD), because there is a higher ER at
lower risk. The choice between (BC) and (CD) would depend on the investor's risk-return
tradeoff.
(b)

(1)

Prepared By Mohammad Abdullah Shah Bukhari

Institute Of Management Sciences University Of Balochistan Quetta

The two key components Risk & Return.

Return %
Standard deviation %
Covariance %
Problem 7-4
EG&G GF Wj =
Wi
(1-Wi)
1.0
0.8
0.6
0.2
0.0

14/11/2012

EG&G
25
30

GF
23
25
112.5

0.0
0.2
0.4
0.8
1.0

Portfolio
expected
return (%)

( )

1.0 x 25+ 0.0 x 23

0.8 x 25+ 0.2 x 23
0.6 x 25+0 .4 x 23
0.2 x 25+ 0.8 x 23
0.0 x 25+ 1.0 x 23

25.0
24.6
24.2
23.4
23.0

Portfolio expected returns are endorsed because found correct.

Problem 7-5
EG&G GF Wj =
Wi
(1-Wi)

Portfolio
expected
return (%)

1.0

0.0

25.0

0.8

0.2

24.6

0.6

0.4

24.2

0.2

0.8

23.4

0.0

1.0

23.0

)(

)(

( )( )(
( )(

)(

Variance
(%)

)(
)(

)(
)(

900

)
)

( )(

)(

)(

)(

( )(

)(

)(

)(

( )( )(

)(

)(

637
478
472
625

Portfolio variances are endorsed because found correct.

Prepared By Mohammad Abdullah Shah Bukhari

Institute Of Management Sciences University Of Balochistan Quetta