expected return on stocks

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Tascja

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Suppose an individual has $14,000 to invest and decides to put $1000 in each of 14 stocks picked at random from a large group listed on the local stock exchange. the mean return of the stocks in the group is 10% per year and the variance of the returns of the stocks in the group is 4% per year.


a)Calculate the expected return and variance of the 14 stock portfolios.
... do i have to break down the mean return and variance for each group?


b)Calculate a 90% confidence interval for the portfolio return.

:? any help with equations, i really appreciate your time.

thank you.
 
Sure, break it down, but eventually you will see that with equal variances it will make no differences.

How's your independence assumption?
 
what is an independence assumption?


can you give me some direction of how to start to find the expected return and variance?
is my N = 14,000 and my n = 1,000?

i know how to do the confidence interval but i dont know where to start to find the expected return or variance.

can you please help?
thank you,
tascja
 
You should have these:

\(\displaystyle E[nX] = nE[X]\)

\(\displaystyle Var(nX) = n^{2}Var(X)\)

Are we ringing any bells, yet?
 
You have:

For a single stock:

E[X] = 1000*0.10 = 100

Var(X) = 1000*0.04 = 40

For the Entire Portfolio:

n = 14

E[nX] = nE[X} = 14*100 = 1400

Var(nX) = (n^2)Var(x) = (14^2)*40 = 196*40 = 7840

StandardDeviation = sqrt(Variance) = 88.54

Still, I'm a little worried about the Independence of the individual investments.

1) If none of your textbook, teacher, or other course materials has addressed linear combinations of expectation or variance, I have to wonder how they expect you to solve the problem.

2) If you don't have any reference for "independence", I have to wonder what it is you are studying.

A little background might help. Are you sure you have all the prerequisites for this material? Why are you in this material?
 
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