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2. Expected Return (ROI), Variance of Returns

practical 2 A1

A1: Risk measures

You are given two portfolios. They are characterized with the probabilities that potential returns are achieved as follows:

Portfolio | Expected Return

-15%

-10%

-5%

10%

15%

20%

25%

30%

35%

There are no rows in this table

⁠

This reads as follows: with Portfolio 1 (P1), a return of -15% is achieved with a 5% probability. b) Calculate and compare the expected returns of both portfolios c) Calculate and compare the variances of returns of both portfolios

⁠

Given:

Data: two portfolios. They are characterized with the probabilities that potential returns are achieved as follows:

Portfolio | Expected Return

-15%

-10%

-5%

10%

15%

20%

25%

30%

35%

There are no rows in this table

⁠

This reads as follows: with Portfolio 1 (P1), a return of -15% is achieved with a 5% probability.

Condition: The loss threshold z is here defined at a return level of 0.

What needs to be answered here:

a) Which portfolio would you prefer? Which would you describe intuitively as more risky?

b) Calculate and compare the expected returns of both portfolios

c) Calculate and compare the variances of returns of both portfolios

Formulas to use:

ER = Sum (Return_i * Probability_i)

Practical 5 has variance questions

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