Question

Suppose you currently have a portfolio of three stocks, A, B, and C. You own 500 shares of A, 300 of B, and 1000 of C. The current share prices are $42.76, $81.33, and $58.22, respectively. You plan to hold this portfolio for at least a year. During the coming year, economists have predicted that the national economy will be awful, stable, or great with probabilities 0.2, 0.5, and 0.3, respectively. Given the state of the economy, the returns (one-year percentage changes) of the three stocks are independent and normally distributed. However, the means and standard deviations of these returns depend on the state of the economy, as indicated in the table below.

Means			Stdevs
A	B	C	A	B	C
-30%	-25%	-15%	17%	10%	12%
-3%	4%	8%	10%	8%	6%
20%	25%	22%	15%	10%	10%

a. Use @RISK to simulate the value of the portfolio and the portfolio return in the next year.

Round your portfolio value answer to a whole number, and, if necessary, round your portfolio return answer to three decimal digits.

Portfolio value	$
Portfolio return

How likely is it that you will have a negative return? How likely is it that you will have a return of at least 25%? If necessary, round your answers to three decimal digits.

Pr(Portfolio return < 0%)
Pr(Portfolio return > 25%)

b. Suppose you had a crystal ball where you could predict the state of the economy with certainty. The stock returns would still be uncertain, but you would know whether your means and standard deviations come from row 6, 7, or 8 of the file P16_20.xlsx. If you learn, with certainty, that the economy is going to be great in the next year, run the appropriate simulation to answer the same questions as in part a.

	Great
Portfolio value	$
Portfolio return
Pr(Portfolio return < 0%)
Pr(Portfolio return > 25%)

Repeat this if you learn that the economy is going to be awful.

	Awful
Portfolio value	$
Portfolio return
Pr(Portfolio return < 0%)
Pr(Portfolio return > 25%)

Answer 1