Tommy1005
01-25-2010, 11:12 AM
Hello everyone, my friend and I have been pounding our heads together for the past hour trying to figure out this problem with no luck.. Hopefully we can get some insight here, thanks for any help we really do appreciate it!
First of all heres the information..
"You are considering two investment opportunities, namely, Investment A and Investment B. Suppose, the rate of return on Investment A can be described by a Normal distribution with mean 8% and standard deviation 4%, and the rate of return on Investment B can be described by a Normal distribution with mean 5% and standard deviation 5%."
a) If you allocate half of your portfolio to each investment, what is the expected rate of return?
b) Consider the alternative strategy of allocating one-third of your portfolio to Investment A, and the remaining two-thirds to Investment B. What is the expected rate of return on this alternative strategy?
c) How would you measure the risk associated with the two investment strategies outlined in parts (a) and (b)? Based on this measure, which investment strategy would you prefer - the one outlined in part (a), or the one outlined in part (b)?
So we think you need to find the Z-score for investment A & B. so you do x-u/o So x-8/4, Were not sure what to use for x. We would do the same for Investment B as well.. Were just stuck.. any help would be greatly appreciated, thanks so much in advance.
First of all heres the information..
"You are considering two investment opportunities, namely, Investment A and Investment B. Suppose, the rate of return on Investment A can be described by a Normal distribution with mean 8% and standard deviation 4%, and the rate of return on Investment B can be described by a Normal distribution with mean 5% and standard deviation 5%."
a) If you allocate half of your portfolio to each investment, what is the expected rate of return?
b) Consider the alternative strategy of allocating one-third of your portfolio to Investment A, and the remaining two-thirds to Investment B. What is the expected rate of return on this alternative strategy?
c) How would you measure the risk associated with the two investment strategies outlined in parts (a) and (b)? Based on this measure, which investment strategy would you prefer - the one outlined in part (a), or the one outlined in part (b)?
So we think you need to find the Z-score for investment A & B. so you do x-u/o So x-8/4, Were not sure what to use for x. We would do the same for Investment B as well.. Were just stuck.. any help would be greatly appreciated, thanks so much in advance.