Question

The current value of a stock portfolio is $10,000. Suppose a financial analyst summarized the following information about one particular investment in the following table. Fill in the blanks and calculate the portfolio expected holding-period return, the standard deviation of returns, and the 5% VAR.

Scenarios	Probability	End-of-period Portfolio Value	Return
Good	.2	28,000
Normal	.5	11,000
Bad	.3	7,000

Answer 1

Return in Good economy = ($28,000 - $10,000) / $10,000

= $18,000 / $10,000

= 180%

Return in Good economy is 180%.

Return in Normal economy = ($11,000 - $10,000) / $10,000

= $1,000 / $10,000

= 10%

Return in Normal economy is 10%.

Return in Bad economy = ($7,000 - $10,000) / $10,000

= -$3,000 / $10,000

= -30%

Return in Bad economy is -30%.

Expected return and standard deviation is calculated in excel and screen shot provided below:

Expected return is 32% and standard deviation is 76%.