Sign up  |  Log in

Reading 19 Section 4 Prob-wtd return vs Exp. return

To illustrate, assume that a portfolio associated with a goal has an expected return of 7% with 10% expected volatility and the investor has indicated that the goal is to be met over the next five years with at least 90% confidence. Over the next five years, that portfolio is expected to produce returns of 35% with a volatility of 22.4%.25 In short, this portfolio is expected to experience an average compound return of only 1.3% per year over five years with a probability of 90%; this result is quite a bit lower than the portfolio’s average 7% expected return (see Exhibit 34).

Does anyone know how the reading is calculating this 1.3% number? I don’t really understand the section & what the reading is trying to get at

With exam day right around the corner, Schweser's Final Review products are designed to help you finish out your study plan and walk into the testing center feeling prepared and confident.

They probably did a Monte Carlo simulation.

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams

The 1.3% is not shown how they calculate it, but it is likely a monte carlo type of calculation to come up with probabilities. Look at Exhint 36 which shows numbers.