Bonds Exercise Problems

School of Business University of Puerto Rico Río Piedras PORTFOLIO abridgement NOTES AND PRACTICE EXERCISES Expected Return of a Portfolio The pass sentiment fall back of a portfolio is the weighted total of the try returns of its component securities, that is, n E(Rp) = ? Xi E(Ri) i=1 = X1 E(R1) + X2 E(R2) + + Xn E(Rn) where, E(Rp) = expect return of the portfolio E(Ri) = anticipate return of security i Xi = proportion of portfolios look on invested in security i n = get along of securities in the portfolio n ? Xi = X1 + X2 + + Xn = 1 i=1 What is the contribution of security i to the expected return of the portfolio? Xi E(Ri) Please none that all the statements to a higher place are true regardless of any presence or absence of dependence among the security returns. Portfolio summary Notes and Practice Exercises page 2 variability and Standard deflection of a Portfolio In general, the fluctuation (or the standard deviation) of the retur ns of a portfolio is not a weighted average of the divergencys (or the standard deviations) of the returns of the portfolios component securities.

Instead, the calculations croak as follows: ?2(Rp) = X12 ?2(R1) + X22 ?2(R2) + + Xn2 ?2(Rn) + 2X1X2Cov (R1,R2) + + 2X1XnCov (R1,Rn) + 2X2X3Cov (R2,R3) + + 2X2XnCov (R2,Rn) + + 2Xn-1XnCov (Rn-1,Rn) n ?2(Rp) = ? Xi2 ?2(Ri) + i=1 n Variance Terms n-1 n 2? ? XiXjCov (Ri,Rj) i = 1 j = i+1 n(n-1) Covariance Terms (Note that the outset expression to the in good distinguish of the equal sign contains n variance impairment, whereas the second expression contains n(n-1) covariance terms. Therefore, as the form of securities in a portfolio in creases, the number of terms in the second e! xpression becomes lots greater than the number of terms in the first expression. As a result, we deal say that the larger the portfolio, as mensurable by the number of securities it contains, the more that its risk (variance) is determined by the kind of comovement that thither exists between the returns of the securities in...If you want to get a full essay, order it on our website: OrderEssay.net

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