Joint probability distrbution: analysis of stock portfolios

A B P(a,b) A * p(a,b) B * p(a,b) AB*p(a,b) A^2 *p(a,b) B^2 *p(a,b)

45 40 0.24 10.8 9.6 432 486 384
45 50 0.003333 0.149985 0.16665 7.49925 6.749325 8.3325
45 60 0.003333 0.149985 0.19998 8.9991 6.749325 11.9988
45 70 0.003333 0.149985 0.23331 10.49895 6.749325 16.3317
50 40 0.003333 0.16665 0.13332 6.666 8.3325 5.3328
50 50 0.24 12 12 600 600 600
50 60 0.003333 0.16665 0.19998 9.999 8.3325 11.9988
50 70 0.003333 0.16665 0.23331 11.6655 8.3325 16.3317
55 40 0.003333 0.183315 0.13332 7.3326 10.082325 5.3328
55 50 0.003333 0.183315 0.16665 9.16575 10.082325 8.3325
55 60 0.24 13.2 14.4 792 726 864
55 70 0.003333 0.183315 0.23331 12.83205 10.082325 16.3317
60 40 0.003333 0.19998 0.13332 7.9992 11.9988 5.3328
60 50 0.003333 0.19998 0.16665 9.999 11.9988 8.3325
60 60 0.003333 0.19998 0.19998 11.9988 11.9988 11.9988
60 70 0.24 14.4 16.8 1008 864 1176
1.00 52.50 55.00 2946.66 2787.49 3149.99

Portfolio comprises of: 5 shares of stock A and 10 shares of stock B

Let W denote the portfolio value

E[W] 812.50 i.e. 5*E(A))+(10*E(B)

Var(W) #VALUE! i.e. 5^2*Var(A)+10^2*Var(B)+2*5*10*Cov(A,B)

C D P(c,d) C* p(a,b) D* p(a,b) CD*p(c,d) C^2 *p(c,d) D^2 *p(c,d)

45 40 0.003333 0.149985 0.13332 5.9994 6.749325 5.3328
45 50 0.003333 0.149985 0.16665 7.49925 6.749325 8.3325
45 60 0.003333 0.149985 0.19998 8.9991 6.749325 11.9988
45 70 0.24 10.8 16.8 756 486 1176
50 40 0.003333 0.16665 0.13332 6.666 8.3325 5.3328
50 50 0.003333 0.16665 0.16665 8.3325 8.3325 8.3325
50 60 0.24 12 14.4 720 600 864
50 70 0.003333 0.16665 0.23331 11.6655 8.3325 16.3317
55 40 0.003333 0.183315 0.13332 7.3326 10.082325 5.3328
55 50 0.24 13.2 12 660 726 600
55 60 0.003333 0.183315 0.19998 10.9989 10.082325 11.9988
55 70 0.003333 0.183315 0.23331 12.83205 10.082325 16.3317
60 40 0.24 14.4 9.6 576 864 384
60 50 0.003333 0.19998 0.16665 9.999 11.9988 8.3325
60 60 0.003333 0.19998 0.19998 11.9988 11.9988 11.9988
60 70 0.003333 0.19998 0.23331 13.9986 11.9988 16.3317
52.50 55.00 2828.32 2787.49 3149.99

Portfolio now comprises of: 5 shares of stock C and 10 shares of stock D

Let W" denote the portfolio value

E[W"] 812.50 i.e. 5*E(A))+(10*E(B)

Var(W) 7367.162 i.e. 5^2*Var(A)+10^2*Var(B)+2*5*10*Cov(A,B)

Thus, we see that the effect of the negative covariance is to reduce the variance
and, hence, to reduce the risk of the portfolio
A*B* p(a,b)
432
7.49925
8.9991
10.49895
6.666
600
9.999
11.6655
7.3326 E(A) 52.50
9.16575 E(B) 55.00
792 Var(A) 31.26
12.83205 Var(B) 125.01
7.9992 Cov(A,B) #VALUE!
9.999
11.9988
1008

C*D* p(c,d)
5.9994
7.49925
8.9991
756
6.666
8.3325
720
11.6655 E(A) 52.50
7.3326 E(B) 55.00
660 Var(A) 31.26
10.9989 Var(B) 125.01
12.83205 Cov(A,B) -59.16
576
9.999
11.9988
13.9986
2828.32
X Y P(x) P(y) XY XY*P(x) E(X) E(Y)
0 0 0 0 0 0 0 0
1 0 0.5 0.5 0 0 0.5 0
1 1 0 0 1 0 0 0
0 1 0.5 0.5 0 0 0 0.5
E(XY) 0 0.5 0.5
Cov E(XY)-E(X)E(Y)
Stock A Stock B P(a,b) E(a) E(b) AB*P(a,b) A^2P(a,b) B^2P(a,b)
45 40 0.24 10.8 9.6 432 486 384
45 50 0.003333 0.149985 0.16665 7.49925 6.749325 8.3325
45 60 0.003333 0.149985 0.19998 8.9991 6.749325 11.9988
45 70 0.003333 0.149985 0.23331 10.49895 6.749325 16.3317
50 40 0.003333 0.16665 0.13332 6.666 8.3325 5.3328
50 50 0.24 12 12 600 600 600
50 60 0.003333 0.16665 0.19998 9.999 8.3325 11.9988
50 70 0.003333 0.16665 0.23331 11.6655 8.3325 16.3317
55 40 0.003333 0.183315 0.13332 7.3326 10.082325 5.3328
55 50 0.003333 0.183315 0.16665 9.16575 10.082325 8.3325
55 60 0.24 13.2 14.4 792 726 864
55 70 0.003333 0.183315 0.23331 12.83205 10.082325 16.3317
60 40 0.003333 0.19998 0.13332 7.9992 11.9988 5.3328
60 50 0.003333 0.19998 0.16665 9.999 11.9988 8.3325
60 60 0.003333 0.19998 0.19998 11.9988 11.9988 11.9988
60 70 0.24 14.4 16.8 1008 864 1176
52.49979 54.99978 2946.6552 2787.48885 3149.9874

Covariance 59.1783
Variance A 31.2609
Variance B 125.0116

5A+10B 812.49675
Cov(5A+10B) 19200.5125

C D P(c,d) E© E(D) C*D*P(C,D) E(C^2) E(D^2)

45 40 0.003333 0.149985 0.13332 5.9994 6.749325 5.3328
45 50 0.003333 0.149985 0.16665 7.49925 6.749325 8.3325
45 60 0.003333 0.149985 0.19998 8.9991 6.749325 11.9988
45 70 0.24 10.8 16.8 756 486 1176
50 40 0.003333 0.16665 0.13332 6.666 8.3325 5.3328
50 50 0.003333 0.16665 0.16665 8.3325 8.3325 8.3325
50 60 0.24 12 14.4 720 600 864
50 70 0.003333 0.16665 0.23331 11.6655 8.3325 16.3317
55 40 0.003333 0.183315 0.13332 7.3326 10.082325 5.3328
55 50 0.24 13.2 12 660 726 600
55 60 0.003333 0.183315 0.19998 10.9989 10.082325 11.9988
55 70 0.003333 0.183315 0.23331 12.83205 10.082325 16.3317
60 40 0.24 14.4 9.6 576 864 384
60 50 0.003333 0.19998 0.16665 9.999 11.9988 8.3325
60 60 0.003333 0.19998 0.19998 11.9988 11.9988 11.9988
60 70 0.003333 0.19998 0.23331 13.9986 11.9988 16.3317
52.49979 54.99978 2828.3217 2787.48885 3149.9874
E(c) 52.49979
E(d) 54.99978
Var c 31.2609
Var d 125.0116
COV c,d -59.1552

5C+10D 812.49675
Variance(5C+10D) 7367.16249