One popular mixture of this is total dollar return total percentage return standard deviation net acid value the greater it is the risk of the investment has been in the past
Added by Margarita E.
Step 1
The terms include "total dollar return," "total percentage return," "standard deviation," and "net acid value." Show more…
Show all steps
Your feedback will help us improve your experience
Joanna Quigley and 59 other Principles of Accounting educators are ready to help you.
Ask a new question
Labs
Want to see this concept in action?
Explore this concept interactively to see how it behaves as you change inputs.
Recommended Videos
Joanna Q.
Problem (Value at Risk) - In finance, VaR does not stand for variance but for "value at risk." It is another measure of risk. It was introduced by J.P. Morgan in the 1980s as a way to answer questions often asked by investors: "How much might I lose?" Let q be a random variable representing the profit on an investment at the end of some time horizon, such as a year. If X is negative, the investment results in a loss. Choose a confidence level, commonly used value is 95%. The 95%-VaR is the value for which P(X < 2) = 0.05. This means that the profit on the investment will be greater than 2 with probability 0.05, and it will be smaller with probability 0.95. In particular, if X is negative and the loss is $1 million or greater, it will occur with probability 0.57. (1.1) Easy: An investment has a profit at the end of year that is normally distributed with a mean of $1 million and a standard deviation of $0.5 million. What is the 95%-VaR of investment A? (1.2) Moderate: The investor owning investment A considers the potential loss calculated in (1.1) to be excessive. Risk might be reduced using a hedging strategy. Also available is investment B, with a profit at the end of year that has a mean of $3 million and a standard deviation of $1 million. The correlation between the profits on investments A and B is 0.8. What is the expected profit of investment A+B at the end of year? What is the standard deviation of the profit on investment A+B at the end of year? Assuming that the profit on investment A+B is normally distributed, compute the 95%-VaR of investment A+B. (1.3) Challenging: The investor is considering hedged portfolios of the form A + B. Can you find the value that minimizes the variance of this portfolio? Assuming that the profit on investment B is normally distributed, compute the 95%-VaR of investment A+B for the value found above.
Rachel G.
Consider a portfolio of two stocks, A and B, where their rate of return (RoR) is represented by random variables X and Y. We are interested in assessing the mean and standard deviation of the RoR for the portfolio R, which entails a 40% investment in stock A and a 60% investment in stock B. Stock A B ROR X Y Mean ROR 0.4% 1.5% Std. Dev. of ROR 0.8% 4.5% Correlation of RORs - 0.6
Amman Z.
Recommended Textbooks
Horngren’s Cost Accounting
Cost Accounting A Managerial Emphasis
Principles of Accounting Volume 1: Financial Accounting
Transcript
Watch the video solution with this free unlock.
EMAIL
PASSWORD