# Finance

 Purchased \$1120 Sold \$1085 Coupon \$120 Find Dollar Return Dollar Return = (1085-1120)+120=\$85 Dollar Return \$85 Purchased \$1120 Find Percent Return Percent Return= 85/1120=7.6% (Nominal= not adjusted for inflation) Nominal Return= 7.6% Inflation= 4% Find Real Return (1+.076)=(1+.04)(1+r)r=3.46% Economy Pi Ra Rb BOOM .40 30% -5% BUST .60 -10% 25% Expected Return? Risk? E(Ra)=(.4)(.3)+(.6)(-.1)=6%E(Rb)=(.4)(-.05)+(.6)(.25)=13% B has Higher Return VarA=(.4)(.3-.06)2+(.6)(-.1-.06)2 =.0384oA=Square root of .0384=.196=19.6%VarB=(.4)(-.05-.13)2 +(.6)(.25-.13)2 =.0216oB= Square root of .0216=.147=14.7% E(R) 6% 13% O 19.6% 14.5% What is the Portfolio Return and Risk Method 1A=25% | E(Rp)=(.25)(.06)+(.75)(.13)=B=75% |11.25% Method 2Boom .4 | (.25)(.3)+(.75)(-.05)=3.75%Bust .6 | (.25)(-.1)+(.75)(.25)=16.25%E(Rp)=(.4)(.0375)+(.6)(.1625)= 11.25% If portfolio risk is needed, use second methodVarp=(.4)(.0375-.1125)2 +(.6)(.1625-.1125)2 =.00375Op=Suqare root of .00375=.06123=6.1% Authorbmercil ID55673 Card SetFinance DescriptionFinal Updated2010-12-13T22:43:15Z Show Answers