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Homework answers / question archive / Consider portfolios made up of only 3 possible stocks
Consider portfolios made up of only 3 possible stocks. Let A, B and C (random variables) denote the random returns on the 3 stocks.
Assume returns are independent for these three stocks. An analyst estimates that each of the stocks' returns is normally distributed.
In addition, the analyst predicts: Standard Mean Deviation A 8.0% 0.5% B 11.0% 6.0% C 17.0% 20.0%
Consider the following two portfolios: • “Safe” Portfolio: 0.5 of fortune in stock A, 0.25 in stock B, and 0.25 in stock C.
• “Risky” Portfolio: 0.333 of fortune in stock A, 0.333 in stock B, and 0.333 in C.
Which portfolio is “better”? Which has a higher probability of losing money? Let S and R represent the investment returns for portfolios Safe and Risky respectively
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