Question

***I ONLY NEED C2 ANSWERED PLEASE**

Consider the following information on three stocks:

Rate of Return If State OccursState of EconomyProbability of State
of EconomyStock AStock BStock CBoom .20 .20 .32 .54 Normal .45 .18 .16 .14 Bust .35 .02 −.34 −.42

a-1 If your portfolio is invested 40 percent each in A and B and 20 percent in C, what is the portfolio expected return? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Portfolio expected return %

a-2 What is the variance? (Do not round intermediate calculations and round your answer to 5 decimal places, e.g., 32.16161.)

Variance

a-3 What is the standard deviation? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Standard deviation %

b. If the expected T-bill rate is 3.80 percent, what is the expected risk premium on the portfolio? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Expected risk premium %

c-1 If the expected inflation rate is 3.40 percent, what are the approximate and exact expected real returns on the portfolio? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

Approximate expected real return %Exact expected real return %

ONLY NEED THIS QUESTION (C-2) ANSWERED PLEASE

c-2 What are the approximate and exact expected real risk premiums on the portfolio? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

Approximate expected real risk premium %

Exact expected real risk premium %

all data is there

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 *0.20) + (0.40 * 0.32 ) + (0.20 *0.54)

= 0.08 + 0.128 + 0.108

= 0.316

Normal

Expected return = (0.40 *0.18) + (0.40 * 0.16 ) + (0.20 *0.14)

= 0.164

Bust

Expected return = (0.40 *0.02) + (0.40 * -0.34) + (0.20 *-0.42)

   = 0.008 -0.136 - 0.084

= -0.212

Expected return of the portfoilo = (probability of economy *Expected return of Boom ) + (Probability of economy *Expected return of Normal ) + (probability of economy *Expected return of Bust )

= ( 0.20 * 0.316 ) + (0.45 *0.164 ) + (0.35 * -0.21)

= 0.0632 + 0.0738 - 0.0735

= 0.0635

Expected Real return = ( Expected return - Inflation rate ) / ( 1 + inflation rate )

  = ( 0.0635 - 0.034 ) / ( 1 + 0.034 )

= 0.0295 / 1.034

= 0.02852

= 2.85 %