# Exam Day Calculation

I am stuck on Vol.1, Exam 3 AM, Q #24! It gives the probabilities and the rate of return for 2 stocks. The question is: what is the expected return and variance of this two-stock portfolio? I am able to get the expected return, but I have done the variance at least 3 times now and continue to get the same answer (EVEN looking in the book at the formula) and it’s not right! This has literally taken me 20 minutes! Are there going to be questions (with this much calculation) like this on the actual exam? I mean, that’s a HUGE chunk of time…

soxboys21 Wrote: ------------------------------------------------------- > I am stuck on Vol.1, Exam 3 AM, Q #24! > > It gives the probabilities and the rate of return > for 2 stocks. > > The question is: what is the expected return and > variance of this two-stock portfolio? > > I am able to get the expected return, but I have > done the variance at least 3 times now and > continue to get the same answer (EVEN looking in > the book at the formula) and it’s not right! This > has literally taken me 20 minutes! > > Are there going to be questions (with this much > calculation) like this on the actual exam? I > mean, that’s a HUGE chunk of time… Can you post the question in here! lets have a look at us

Alright, give me a moment… Unfortunately, I haven’t finished the test, so I don’t even have the answer… =)

I saw one of these on the mock exam and didn’t even try to plug in the numbers. That one question wasn’t worth my time.

So, if someone can post an easier way to do it, that would be awesome!!

I am an idiot! When typing this up in word, I found my ONE mistake in all of these flippin’ numbers! I FINALLY got the right answer! However, this is long, are we expected to do this on the actual exam?!?!?!? An analyst develops the following information for 2 stocks. 50% of the funds are invested in each stock. Scenario 1 Scenario 2 Scenario 3 Probability .5 .3 .2 Rate of Return Stock A 25% 10% -25% Stock B 1% -5% 35 The expected return and the variance of this two-stock portfolio are closest to: Expected Return/Variance A. 8.25/23.31 B. 8.25/48.09 C. 10.50/23.31 D. 10.50/48.09 R(A) = (.25)(.5) + (.3)(.10) + (.2)(-.25) = .105 R(B) = (.01)(.5) + (.3)(-.05) + (.2)(.35) = .06 E(Ra,b) = (.105)(.5) + (.06)(.5) = .0825 Therefore, I can eliminate C and D Var(A) = .5(.25-.105)^2 + .3(.10-.105)^2 + .2(-.25-.105)^2 = .035725 Var(B) = .5(.01-.06)^2 + .3(-.05-.06)^2 + .2(.35-.06)^2 = .0217 Cov(a,b)=0.5(.25-.105)(.01-.06) + .3(.1-.105)(-.05-.06) + .2(-.25-.105)(.35-.06) = -.02405 Var(Portfolio) = (.5)^2(.035725) + (.5)^2(.0217) + 2(.5)(.5)(-.02405) = .00233125 Answer is A: 8.25/23.31

Yep man, I am pretty sure there will be a question requesting to calculate porfolio variance.

I understand it’s great to know the formual and how to calculate it, but they’ve got computer models and formulas to run these, so the analysts don’t have to crunch these numbers constantly!

soxboys21 Wrote: ------------------------------------------------------- > I understand it’s great to know the formual and > how to calculate it, but they’ve got computer > models and formulas to run these, so the analysts > don’t have to crunch these numbers constantly! Since I was studying at Uni, I always went thorugh this exercice… I always continued asking myself why they want use to manually calculate this formula if in real life they’ve got computer models to run these… However, I cant find the answer yet

There are a lot of questions on this exam that irritate me b/c I can do them on Bloomberg in a fraction of a second.

Even if you input the right numbers in the first place (which I didn’t), this still is a 5+ minute question, EASILY!

soxboys21 Wrote: ------------------------------------------------------- > Even if you input the right numbers in the first > place (which I didn’t), this still is a 5+ minute > question, EASILY! Well I would say 2-3min… unless you have arthritis

i think they might ask some conceptual questions w/ regards to portfolio std. dev, since its especially tricky, as opposed to asking you to compute it numerically.

Here’s the answer and I went the LONG WAY!!! How did they arrive at 13%, 2.5%, and 5%??? Calculate portfolio returns for the three scenarios using equal weights and get 13%, 2.5%, and 5%. Then calculate the portfolio expected return (8.25%) and variance using the scenario weights = [0.5(13 – 8.25)2 + 0.3(2.5 – 8.25)2 + 0.2(5 – 8.25)2] = 23.3125

Nevermind, since its 50/50, you just multiply each return by 50% and add them together. I was trying to take .3 and .2 and that wasn’t working!

soxboys21 Wrote: ------------------------------------------------------- > I understand it’s great to know the formual and > how to calculate it, but they’ve got computer > models and formulas to run these, so the analysts > don’t have to crunch these numbers constantly! … True, the ones I work with all use pre-definied functions and softwares that do the calculation for them.

God, I wish portfolio management and derivatives were more heavily weighted on this exam.