Question

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 %

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 %

Answer 1