Efficient Portfolio Thesis

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Efficient Portfolio

The weighted average expected return under the new scenario will be 14%. This is calculated as follows:

The standard deviation of returns under the new scenario is 24.5. We calculate the difference between each potential return and the mean. Thus,

(44-14) = 30; (14-14) = 0, and (14+16) = 30.

Each is squared, and then the squares are added together. So 302 = 900. This means that the sum of squares is 900 + 0 + 900 = 1800. This is divided by the number of data points, as follows:

This is the variance. To obtain the standard deviation we take the square root of 600 as follows:

The expected return is .333(12)+(.333)(4)+(.333)(-5.5) = 3.5

The standard deviation therefore is 12.38.

With half in T-bills the expected return is 3.75%. The standard deviation is therefore 6.015. The expected return improves because you reduce the downside risk with the T-bills. This also reduces the variability of the portfolio as well.


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Thesis on Efficient Portfolio Assignment

(.5)(15)+(.4)(10)+(.1)(6) = 12.1%… [END OF PREVIEW] . . . READ MORE

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