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You are considering investing in a well-diversified portfolio of various stock
You are considering investing in a well-diversified portfolio of various stock. Your stockbroker has informed you that the expected return for such a portfolio is 12.3%. Further information reveals that the standard deviation of such a portfolio is 6.5%. Based on the information provided, what is the a) probability or chance of positive returns. b) threshold for outliers? That is, find the interval outside of which outlier returns would be found.
Expert Solution
a) The formula of expected return for an Investment with various probable returns can be calculated as a weighted average of all possible returns which is represented as below,
Expected return = (p1 * r1) + (p2 * r2) + ………… + (pn * rn)
- pi = Probability of each return
- ri = Rate of return with different probability.
In short higher probablity higher Return or Lower Probablity lower Return.
b) When Confidence level is 99%
| Parameters | ||
| Portfolio Value | 100 | |
| Average Return | 0.121 | |
| Standard Deviation | 0.065 | |
| Confidence Level | 0.99 | |
| Calculations | ||
| Min Return with 99% prob | -0.030 | NORM.INV(1-B8,B6,B7) |
| Value of Portfolio | 97.009 | B5*(B11+1) |
| Value at Risk | 2.991 | B5-B12 |
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