Question

Consider the following information about three stocks:

  

				Rate of Return If State Occurs
State of	Probability of
Economy	State of Economy			Stock A			Stock B			Stock C
Boom		0.20			0.24			0.36			0.58
Normal		0.50			0.20			0.18			0.16
Bust		0.30			0.04			?0.36			?0.45

  

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 the answer as a percent rounded to 2 decimal places.)

Portfolio expected return

%

a-2	What is the variance? (Do not round intermediate calculations. Round the final answer to 5 decimal places.)

  

Variance

  

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

Standard deviation

%

b.	If the expected T-bill rate is 4.20 percent, what is the expected risk premium on the portfolio? (Do not round intermediate calculations. Enter the answer as a percent rounded to 2 decimal places.)

Expected risk premium

%

  

c-1	If the expected inflation rate is 2.20 percent, what are the approximate and exact expected real returns on the portfolio? (Do not round intermediate calculations. Enter the answers as a percent rounded to 2 decimal places.)

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 the answers as a percent rounded to 2 decimal places.)

Approximate expected real risk premium	%
Exact expected real risk premium	%

Answer 1