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Topic 7 Portfolio Management Exercise 1 : Expected Return of an individual investment Let us take an investment A , which has a 2 0
Topic Portfolio Management
Exercise : Expected Return of an individual investment
Let us take an investment A which has a probability of giving a return on
investment, a probability of generating a return, and a probability of
resulting in a loss.
The probabilities of each potential return outcome are derived from studying
historical data on previous returns of the investment asset being evaluated.
Exercise : Expected Return of an individual investment
Suppose that an investor is considering whether to purchase:
Shares of company ABC or
Shares of company LMN or
Shares of company XYZ
Following months of analysis and research, the investor found out that the expected
returns of the three stocks are as follows:
Probability of
event
Return
Company ABC
Return
Company LMN
Return
Company XYZ
In which company should the investor put hisher capital in order to maximise
hisher expected return.
Topic Portfolio Management
Exercise : Expected Return of a portfolio
Lets assume the portfolio is comprised of investments in three assets X Y and Z
$ is invested in X $ invested in Y and $ is invested in Z Assume
that the expected returns for X Y and Z have been calculated and found to be
and respectively.
Investment Amount invested Expected Return
X $
Y $
Z $
Total $
Exercise : Expected Return of a portfolio
Assume that an investor is considering between the following two portfolio
investments.
Weight Portfolio A Portfolio B
Asset ER
Asset ER
Asset ER
Asset ER
Asset ER
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