IGNOU MTE 14 2018 - The return distribution on 2 securities, A and B is as follows:

Question

The return distribution on 2 securities, A and B is as follows:

Event (j)	Chance p1 j = p 2 j	Return
Event (j)	Chance p1 j = p 2 j	R 1 j	R 2 j
1	0.33	19	18
2	0.25	17	16
3	0.17	11	11
4	0.25	10	9

Find which security is more risky in the Markowitz sense.

15 Feb 2018

Answer :

Word Count : 488

We are asked to compare the risk of two securities $A$ and $B$ in the Markowitz sense, which means we need to calculate expected return and variance (or standard deviation) for each security. Let’s solve this step by step manually. --- ### Step 1: Extract the data | Event $j$ | Probability $p_j$ | $R_{Aj}$ | $R_{Bj}$ | | --------- | ----------------- | -------- | -------- | | 1 | 0.33 | 19 | 18 | | 2 | 0.25 | 17 | 16 | | 3 | 0.17 | 11 | 11 | | 4 | 0.25 | 10 | 9 | --- ### Step 2: Compute expected return $E(R)$ $$ E(R) = \sum p_j R_j $$ For A: $$ E(R_A) = 0.33 \cdot 19 + 0.25 \cdot 17 + 0.17 \cdot 11 + 0.25 \cdot 10 $$ Step by step: * $0.33 \cdot 19 = 6.27$ * $0.25 \cdot 17 = 4.25$ * $0.17 \cdot 11 = 1.87$ * $0.25 \cdot 10 = 2.50$ $$ E(R_A) = 6.27 + 4.25 + 1.87 + 2.50 = 14.89 $$ For B: $$ E(R_B) = 0.33 \cdot 18 + 0.25 \cdot

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