Asignatura

Electiva CPC

Título
Workshop

Presenta:

Jeison Fabián Ardila Rueda

ID: 750379

Profesor:
Blanca Eugenia Tarazona Sanchez
NRC.9549

Colombia, Bucaramanga August, 16 de 2021

Exercise “ Expected Return”

To calculate the expected returns of a portfolio, multiply the portfolio weight of respective security by its expected return and

E(r)p = WiE(r)i+WjE(r)j

Where:
E(r)p = Expected return of portfolio
Wi = Weight of asset i
E(r)I = Expected return of asset i

Exercise 1.

Calculate the expected return of a portfolio with three stocks.

·         Stock A has a expected return of 3% and makes up 25% of the portfolio.
·         Stock B has a expected return of 1% and makes up 50% of the portfolio.
·         Stock c has a expected return of 9% and makes up 25% of the portfolio.

A B C
Weight (W) = 25% 50% 25%
E® 3% 1% 9%

Solution

E(r)p = WiE(r)i+WjE(r)j

E(r)p = 0.7500% + 0.5000% + 2.2500%

E(r)p = 3.5%
urity by its expected return and sum the products.
Exercise 2.
Find the expected return of the portfolio below. The portfolio has equal investments in each asset.

Returns
Probability
State of Economy of state of Stock A Stock B Stock C
Economy
Boom 5 10% 15% 20%
Bust 5 8% 4% 10%
Sescpect Return 9% 10% 15%
Weight 33.33% 33.33% 33.33%

solution

E(r)p = WiE(r)i+WjE(r)j
Sescpect Return

Stock A = 0.5 + 0.4

Stock A = 0.9

Stock B = 0.750 + 0.200

Stock B = 0.95

Stock C = 1.0 + 0.5

Stock C = 1.5

Expected Return Portfolio

E(r)p = WiE(r)i+WjE(r)j

E(r)p = 3.00% + 3.33% + 5.00%

Recall, to calculate the variance of stock
1.       Find the expected return
2.       Calculate the return deviation (Return State-Expected Return)
3.       Square the return deviation
4.       Multiply squared return deviation by probability of each State
5.       Add results to find variance.
Exercise 3. Stock Variance
To practice, consider the expected returns of ABC Corp, what is the variance of the stock?

State of Probability
of State of ABC Corp
Economy
Economy
Boom 0.2 70%
Bust 0.8 -20%
Expected
-2%
Return

The next step is to calculate the return deviation of the equity

Boom 68%
Bust -22%

Probability
State of Return Squared Stock
of State of ABC Corp
Economy desviation desviation variance
Economy
Boom 0.2 70% 68% 46.24 9.248
Bust 0.8 -20% -22% 4.84 3.872
Expected
-2%
Return

Stock
13.12%
desviation