4. Suppose that a set of portfolio managers has a chance p = 50% of beating...
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4. Suppose that a set of portfolio managers has a chance p = 50% of beating the market by 10% in a given year and chance 1 - p of underperforming by 10%. Performance from one year to the next is independent and uncorrelated. Returns are simple returns and compounding is ignored. (a) What is the probability that a manager will achieve a five-year track record which beats the market for at least 4 out of 5 years? (b) Suppose that unsuccessful managers get forced out of business as soon they are down overall -30%; that is, as soon as as their record contains 3 more losing years than winning years. What is the probability of failure over a five-year horizon? (c) Among those who survive, what is the expected total return? 4. Suppose that a set of portfolio managers has a chance p = 50% of beating the market by 10% in a given year and chance 1 - p of underperforming by 10%. Performance from one year to the next is independent and uncorrelated. Returns are simple returns and compounding is ignored. (a) What is the probability that a manager will achieve a five-year track record which beats the market for at least 4 out of 5 years? (b) Suppose that unsuccessful managers get forced out of business as soon they are down overall -30%; that is, as soon as as their record contains 3 more losing years than winning years. What is the probability of failure over a five-year horizon? (c) Among those who survive, what is the expected total return?
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a Probability of Beating the Market for at Least 4 out of 5 Years We can solve this problem using binomial probability Each year theres a 50 chance of ... View the full answer
Related Book For
Macroeconomics Principles and Applications
ISBN: 978-1133265238
5th edition
Authors: Robert e. hall, marc Lieberman
Posted Date:
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