Page 80 - DMGT207_MANAGEMENT_OF_FINANCES

Unit 4: Risk and Return Analysis

Notes
2
Probability (P) Return (%) (R) (P × R) (R – R) (R – R) P
0.05 6 0.30 - 9.5 4.5125
0.15 10 1.50 -5.5 4.5375
0.40 15 6.00 -0.5 0.1000
0.25 18 4.50 2.5 1.5625
0.10 20 2.00 4.5 2.0250
0.05 24 1.20 8.5 3.6125
1.00 R = 15.5 Σ(R – R) P = 16.35
2

Expected Return of Security X = 15.5%
Standard Deviation of Security X

σ 2 y = 16.35
 = 16.35 = 4.04%
y
Calculation of expected return and standard deviation of Security Y

Probability (P) Return (%) (R) (P × R) (R –R) (R –R) P
2
0.10 5 0.50 -7.25 5.2563
0.20 8 1.60 -4.25 3.6125
0.30 12 3.60 -0.25 0.0188
0.25 15 3.75 2.75 1.8906
0.10 18 1.80 5.75 3.3063
0.05 20 1.00 7.75 3.0031
12.25 Σ(R –R) P = 17.0876
2

Expected Return Security Y(R) = 12.25%

Standard Deviation of Security Y
σ 2 y = 17.086

 = 17.0876 = 4.134%
y
Analysis – Security X has higher expected return and lower level of risk as compared to
Security Y.

4.7 Return and Risk of Portfolio

4.7.1 Return of Portfolio (Two Assets)

The expected return from a portfolio of two or more securities is equal to the weighted average
of the expected returns from the individual securities.
(R ) = W (R )+ W (R )
P A A B B
Where,
(R ) = Expected return from a portfolio of two securities
P
W = Proportion of funds invested in Security A
A

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