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In: Finance
Why is it useful to calculate the standard deviation of expected returns on a security? What...
Why is it useful to calculate the standard deviation of expected returns on a security? What is the main practical reality that limits the usefulness of this calculation?
Solutions
Expert Solution
Standard deviation of expected return of a portfolio means that degree of deviation of expected return from the mean.
An investor uses the expected return to forecast return associated with portfolio and its uses standard deviation to discover that which are the outperformers of the portfolio and which are the underperformers of the portfolio. There is always an inclination to buy more of the outperformers and reduce more of the underperformers.
These are calculated to judge the overall performance of portfolio and the rate of expected deviation as well as the rate of expected return.
There are various limitation which are associated with standard deviation of expected return like the probabilities cannot be accurately estimated as well as the deviations are also an estimations from the original and when there are extreme values into the series, there is a limitation of use of standard deviation. Standard deviation are also complex to compute and these cannot be obtained for open end class frequency distribution.
jeff jeffy answered 1 year agoRelated Solutions
Why is it useful to calculate the standard deviation of expected returns on a security? What...
Why is it useful to calculate the standard deviation of expected
returns on a security? What is the main practical reality that
limits the usefulness of this calculation?
Based on the following data; (a) calculate the expected return and the standard deviation of returns...
Based on the following data;
(a) calculate the expected return and the standard deviation of
returns for each stock.
State of the
Economy
Probability Stock A Rate of
Return Stock B Rate of Return
Recession
0.25
6%
-20%
Normal Growth
0.45
7%
13%
Boom
0.3
11%
33%
(b) Calculate the expected return and the standard deviation on
the portfolio, where
the portfolio is formed by investing 65% of the funds in Stock A
and the rest in Stock B
1. What is the expected standard deviation of the returns of a portfolio that is invested...
1. What is the expected standard deviation of the returns of a
portfolio that is invested 25 percent in Stock A, 40 percent in
Stock B, and the remainder invested in Stock C? (Hint: create a
column showing the distribution of returns for the portfolio. Then,
find the portfolio's expected return and variance as normally done
for a single asset.)
State of Economy
Probability
Return of A
Return of B
Return of C
Boom
0.20
29%
15%
6%
Normal
0.50...
You are given the following information on two securities. Security Expected Return Standard Deviation of Returns...
You are given the following information on two securities.
Security
Expected Return
Standard Deviation of Returns
A
10.0%
14.0%
B
16.0%
12.0%
The correlation between the returns on the two securities is
+0.6. The standard deviation of returns of a portfolio earning an
expected return of 14.0 percent is closest to:
Group of answer choices
A 11.4%.
B 9.3%.
C 27.1%.
D 12.7%.
What is the standard deviation of returns of an equally weighted portfolio made up of Security A and Security B?
Security Return(S1)
Return(S2)
A
16%
20%
B
12%
25%
Risk-free asset return = 4%;
S1 is State-1 and S2 is State-2;
Prob(S1) = 0.6;
Prob(S2) = 0.4What is the standard deviation of
returns of an equally weighted portfolio made up of Security A and
Security B?
What is the standard deviation of the returns?
You are analyzing the returns of a mutual fund portfolio for the past 5 years.
Year
Return
2014
-30%
2015
-25%
2016
40%
2017
-10%
2018
15%
What is the standard deviation of the returns?
Is it possible that a security with a positive standard deviation of returns could have a...
Is it possible that a security with a positive standard
deviation of returns could have a beta of zero (excluding T-bills)?
Explain. From the CAPM, what is the expected return on such an
asset? Is it possible that a security with a positive standard
deviation could have an expected return from the CAPM that is less
than the risk-free rate? If so, what would its beta be? Would
anyone be willing to purchase such a stock? Discuss.
Q1: Calculate the standard deviation of returns on a stock that had the following returns in...
Q1: Calculate the standard deviation of returns on a
stock that had the following
returns in the past three years:
Year Return
1 9%
2
-12%
3
18%
Q:
A company has a target capital structure of 55% common
stock, 10% preferred
stock, and 35% debt.
Its cost of equity is 13%, the cost of preferred stock is
7%,
and the cost of debt
is 8%. The relevant tax rate is 30%. What is the
company’s
Weighted Average
Cost...
Describe what happens to the expected value and standard deviation of the portfolio returns when the...
Describe what happens to the expected value and standard
deviation of the portfolio returns when the coeffi cient of
correlation decreases.
What is the expected standard deviation of stock A’s returns based on the information presented in...
What is the expected standard deviation of stock A’s returns
based on the information presented in the table? Answer as a rate
in decimal format so that 12.34% would be entered as .1234 and
0.98% would be entered as .0098. Note that figures in the table are
presented in decimal format, not as percentages. Outcome
Probability of outcome Stock A return in outcome Good 0.2 0.8
Medium 0.5 0.1 Bad ? -0.5
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