Answered: firm’s portfolio risk and return.

Business

Finance

firm’s portfolio risk and return.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 20P

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Concept explainers

Portfolio Management

Portfolio management is the process by which an investor decides that how the person will invest in a variety of assets in order to get a desired return in the future. A portfolio means a pool of assets that includes securities, bonds, and other investment instruments which helps in risk minimization of the money that has been invested. In other words, it can be said that a portfolio means a combination of assets in which an investor decides to invest their money in order to get a lump sum return in the future or even a series of cash flow that the person is expecting at the end of their job life.

Question

Your employer has asked you to investigate the firm’s portfolio risk and return. The portfolio comprises three stocks. It is invested 50 percent in stock A, 30 percent in stock B and 20 percent in stock C. You gathered the following information:

a) Determine what is the portfolio’s expected return

b) Determine the portfolio’s variance and standard deviation

c) Assume that the expected risk-free rate is 2.75 percent. Determine the expected risk premium on the portfolio.

TABLE 1.
Fim Portfolio Data - Expected retums on component stocks (%) in function of the state of the economy
State of the
Rate of Returm (%) for each State of the Eoconomy
Probability of State of
the Economy
Economy
Stock A
Stock B
Stock C
Good
60.00%
3.00%
34.00%
70.00%
Роoг
40.00%
15.00%
-12.00%
-35.00%

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