Question

Consider the following information on a portfolio of three stocks: |

State of Economy |
Probability of State of Economy |
Stock A Rate of Return |
Stock B Rate of Return |
Stock C Rate of Return |

Boom | .15 | .04 | .33 | .55 |

Normal | .60 | .09 | .13 | .19 |

Bust | .25 | .15 | –.14 | –.28 |

a. |
If your portfolio is invested 40 percent each in A and B and 20
percent in C, what is the portfolio’s expected return? The
variance? The standard deviation? |

b. |
If the expected T-bill rate is 3.75 percent, what is the
expected risk premium on the portfolio?
(Do not round intermediate calculations
and enter your answer as a percent rounded to 2
decimal places, e.g., 32.16.) |

A. Expected Return

Variance

Standard Deviation

B. Expected Risk Premium

Answer #1

Weight of Stock A = 0.40

Weight of Stock B = 0.40

Weight of Stock C = 0.20

Boom:

Expected Return = 0.40 * 0.04 + 0.40 * 0.33 + 0.20 * 0.55

Expected Return = 0.2580

Normal:

Expected Return = 0.40 * 0.09 + 0.40 * 0.13 + 0.20 * 0.19

Expected Return = 0.1260

Bust:

Expected Return = 0.40 * 0.15 + 0.40 * (-0.14) + 0.20 *
(-0.28)

Expected Return = -0.0520

Answer a.

Expected Return = 0.15 * 0.2580 + 0.60 * 0.1260 + 0.25 *
(-0.0520)

Expected Return = 0.1013 or 10.13%

Variance = 0.15 * (0.2580 - 0.1013)^2 + 0.60 * (0.1260 -
0.1013)^2 + 0.25 * (-0.0520 - 0.1013)^2

Variance = 0.00992

Standard Deviation = (0.00992)^(1/2)

Standard Deviation = 0.0996 or 9.96%

Answer b.

Expected Risk Premium = Expected Return of Portfolio - Risk-free
Rate

Expected Risk Premium = 10.13% - 3.75%

Expected Risk Premium = 6.38%

Consider the following information on a portfolio of three
stocks:
State of
Economy
Probability of
State of Economy
Stock A
Rate of Return
Stock B
Rate of Return
Stock C
Rate of Return
Boom
.12
.07
.32
.45
Normal
.55
.15
.27
.25
Bust
.33
.16
–.26
–.35
a.
If your portfolio is invested 40 percent each in A and B and 20
percent in C, what is the portfolio’s expected return, the
variance, and the standard deviation? (Do not...

Consider the following
information on a portfolio of three stocks:
State of
Economy
Probability
of
State of Economy
Stock A
Rate of Return
Stock B
Rate of Return
Stock C
Rate of Return
Boom
.14
.05
.35
.47
Normal
.52
.13
.25
.23
Bust
.34
.19
–.24
–.38
Required:
(a)
If your portfolio is invested 42 percent each in A and B and 16
percent in C, what is the portfolio’s expected return, the
variance, and the standard deviation? (Do...

Consider the following information on a portfolio of three
stocks:
State of
Economy
Probability of
State of Economy
Stock A
Rate of Return
Stock B
Rate of Return
Stock C
Rate of Return
Boom
.14
.07
.32
.55
Normal
.55
.15
.17
.25
Bust
.31
.16
–.16
–.35
Required:
(a)
If your portfolio is invested 40 percent each in A and B and 20
percent in C, what is the portfolio’s expected return, the
variance, and the standard deviation? (Do...

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stocks:
State of
Economy
Probability of
State of Economy
Stock A
Rate of Return
Stock B
Rate of Return
Stock C
Rate of Return
Boom
.12
.03
.33
.49
Normal
.54
.11
.23
.21
Bust
.34
.17
–.22
–.36
Required:
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If your portfolio is invested 38 percent each in A and B and 24
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−.26 −.46 a-1. If your portfolio is invested 20 percent each in A
and B and 60 percent in C, what is the portfolio expected return?
(Do not round intermediate calculations and enter your answer as a
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stocks:
State of
Probability of
Stock A
Stock B
Stock C
Economy
State of Economy
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Rate of Return
Rate of Return
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.13
.08
.33
.54
Normal
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.16
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Bust
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−
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State of Economy
Stock A
Stock B
Stock C
Boom
.25
.30
.42
.54
Normal
.45
.12
.10
.08
Bust
.30
.03
−.24
−.44
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State of
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.60
Normal
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Bust
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