Chapter 4 - Diversification
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Table 4-1: Projected Returns on Stock and Bond Funds in Percentage Points

 


  Stock Fund Bond Fund 50-50 Portfolio

Scenario Prob- Return Deviation Return Deviation Return Deviation
ability S S - S B B - B 0.5*(S+B) (S-S)(B-B)

Rapid Growth 25% 30.0 19.0 -2.0 -6.0 14.0 -114.0
Balanced Growth 50% 12.0 1.0 5.0 1.0 8.5 1.0
Recession 25% -10.0 -21.0 8.0 4.0 -1.0 -84.0

Expected Value E[X] 11.0 0.0 4.0 0.0 7.5 -49.0
  E[(X - X)2]   201.0   13.5    
σ   14.177   3.674    
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Example 1:

Tardis Intertemporal (TI) has an expected return of 15% with a standard deviation of 20%

and

Hypothetical Resources (HR) has an expected return of 21% with a standard deviation of 40%

The rates of return are correlated with a correlation coefficient ρ= 30%

75

The first equation on the page should be:

σ 2 = ( wTI2 σTI2 ) + 2  ( wTI σTI * 1.0 * wHRσHR ) + ( wHR2 σHR2 )

75

Under Risk Free Asset and Leverage the second equation should be:

σ2 = ( wP2 σP2 ) + 2  ( wP σP * 0.0 * wRf 0 ) + ( wRf2 0 )

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In both questions 4-6 and 4-7 the questions should specify that the portfolio is 67% Tardis Intertemporal and 33% Hypothetical Resources.