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Purchased $1120
Sold $1085
Coupon $120
Find Dollar Return
 Dollar Return = (10851120)+120
 =$85

Dollar Return $85
Purchased $1120
Find Percent Return
 Percent Return= 85/1120
 =7.6% (Nominal= not adjusted for inflation)

Nominal Return= 7.6%
Inflation= 4%
Find Real Return
 (1+.076)=(1+.04)(1+r)
 r=3.46%

Economy Pi Ra Rb
BOOM .40 30% 5%
BUST .60 10% 25%
Expected Return?
Risk?
 E(Ra)=(.4)(.3)+(.6)(.1)=6%
 E(Rb)=(.4)(.05)+(.6)(.25)=13%
B has Higher Return
 VarA=(.4)(.3.06)^{2}+(.6)(.1.06)^{2 }=.0384
 oA=Square root of .0384
 =.196=19.6%
 VarB=(.4)(.05.13)^{2 }+(.6)(.25.13)^{2 }=.0216
 oB= Square root of .0216
 =.147=14.7%

E(R) 6% 13%
O 19.6% 14.5%
What is the Portfolio Return and Risk
 Method 1
 A=25%  E(Rp)=(.25)(.06)+(.75)(.13)=
 B=75% 11.25%
 Method 2
 Boom .4  (.25)(.3)+(.75)(.05)=3.75%
 Bust .6  (.25)(.1)+(.75)(.25)=16.25%
 E(Rp)=(.4)(.0375)+(.6)(.1625)= 11.25%
 If portfolio risk is needed, use second method
 Varp=(.4)(.0375.1125)^{2 }+(.6)(.1625.1125)^{2 }=.00375
 Op=Suqare root of .00375
 =.06123=6.1%

