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		.25			.30			.42			.54
Normal		.45			.12			.10			.08
Bust		.30			.03			−.24			−.44

  

a-1.	If your portfolio is invested 45 percent each in A and B and 10 percent in C, what is the portfolio expected return? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
a-2.	What is the variance? (Do not round intermediate calculations and round your answer to 5 decimal places, e.g., .16161.)
a-3.	What is the standard deviation? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
b.	If the expected T-bill rate is 3.20 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.)
c-1.	If the expected inflation rate is 2.80 percent, what are the approximate and exact expected real returns on the portfolio? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)
c-2.	What are the approximate and exact expected real risk premiums on the portfolio?(Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

     a-1.Portfolio expected return%

a-2.Variance

a-3.Standard deviation%

b.Expected risk premium%

c-1.Approximate expected real return%

Exact expected real return%

c-2.Approximate expected real risk premium%

Exact expected real risk premium%

Answer 1

Probability Portfolio Returns
0.25 =0.45*0.30+0.45*0.42+0.10*0.54=0.378
0.45 =0.45*0.12+0.45*0.10+0.10*0.08=0.107
0.30 =0.45*0.03-0.45*0.24-0.10*0.44=-0.1385

1.
Expected returns=0.25*(0.378)+0.45*(0.107)+0.30*(-0.1385)=0.1011

2.
Variance=0.25*(0.378-0.1011)^2+0.45*(0.107-0.1011)^2+0.30*(-0.1385-0.1011)^2=0.036406515

3.
Standard Deviation=sqrt(0.036406515)=0.190804913

4.
Expected risk premium=0.1011-0.032=0.0691

P.S.: I am not allowed to answer more than 4 questions