# QUANT again !!!

Help plss Anyone did question 25 (schewser exam2 am) yet??? It’s a bit long and once a gain i don’t get a clue how to resolve it !!! I spent one week studying this topic but it’s all gone now, what i gonna do my god !!!

plzz help me !!!

An investor wants to buy a condominium in Florida. The value of her portfolio is currently \$1,000,000 and she needs \$100,000 in one year for the down payment. She doesn’t mind decreasing her capital as long she has \$950,000 remaining in her portfolio after the down payment is made. She is considering two new portfolios for her holdings. The details on the two portfolios are: Portfolio 1: Expected Annual Return = 17%, Standard Deviation of Returns = 15% Portfolio 2: Expected Annual Return = 12%, Standard Deviation of Returns = 10% According to Roy’s Safety~Firstcriterion, the portfolio she would prefer and the probability that this safety-first-optimal portfolio will produce a return of less than 2% (assuming returns are normally distributed) are: Optimal portfolio Probability < 2% A. Portfolio 1 32% B. Portfolio 1 16% C. Portfolio 2 32% D. Portfolio 2 16%

5% threshold. Portfolio 1 RSF = .80 Portfolio 2 RSF = .70 Therefore, you can omit C & D! Now, the annual return of Portfolio 1 is 17% and one standard deviation (15%) to the left is 2%. One standard deviation equals 68%. With 32% left, there is 16% in either tail; therefore, the answer must be: B

5% threshold = 950000 + 100000/1000000 = 5%

can you explain how you pick the standard deviation???

Portfolio 1 has a stan. dev. of 15% (given) and Portfolio 2 has a stan. dev. of 10% (given). In Portfolio 1, the return is 17%; therefore, +/- 1 stan. dev. equals 2% - 32%. Since it’s a normal distribution, 68% fall under +/- 1 stan. dev. With 32% left, that leaves 16% in each tail… Does that help???

So i’m supposed to know that 68% fall under +/- 1 SD??? can you remind me of other possibilities like under +/- 2 or 3 SD???

OMG, I was racking my brain FOREVER on annother question last week with that 16%, finally I get the 32% with 1/2 to each tail. Doh, Thank you thank you!!!

You’re lucky I’m a nice guy, because most people on AF would kill you for not knowing this: 1 st. dev. = 68% 1.65 st. dev. = 90% 1.96 st. dev. = 95% 2.58 st. dev. = 99%

soxboys21 Wrote: ------------------------------------------------------- > You’re lucky I’m a nice guy, because most people > on AF would kill you for not knowing this: > > 1 st. dev. = 68% > 1.65 st. dev. = 90% > 1.96 st. dev. = 95% > 2.58 st. dev. = 99%

yeah thaaaaaak youuu all people here are soooo nice

If you are not comfortable with the using the standard deviation of ±1 or other there is a simple way to calculate proabability. calculate z-score of 2%: (2-17)/15 ; Portfolio with higher RSF ratio z value = -1 taking positive value of of look it up in z table proabability is 0.8413 the proabability in left tail must be 1- 0.8413 = 15.87 approx 16%