Answered: he following shows the expected…

he following shows the expected percentage returns on three stocks over the next six years: Stock Percentage Return (%) Year 1 2 3

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 1P

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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

The following shows the expected percentage returns on three stocks over the next six years:

Stock

Percentage Return (%)

Year	1	2	3	4	5	6
A	10	5	6	8	12	15
B	8	4	4.8	6.4	9.6	12
C	5	10	12	10	6	6

Required:

i Find the expected return for each of the stock.

ii Compute the variance and standard deviation for stock A, B and C. Show your working.

iii Justify how can you minimize the risk of the above combination of stocks.

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Step 1:We will represent stock A, B and C through X, Y and Z

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Step 2: Calculation of Variance and Standard deviation

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Step 3: Part (iii)

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