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	.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 not round intermediate calculations. Round your variance answer to 5 decimal places (e.g., 32.16161) and input your other answers as a percentage rounded to 2 decimal places (e.g., 32.16).)

Expected return	%
Variance
Standard deviation	%

(b)	If the expected T-bill rate is 4 percent, what is the expected risk premium on the portfolio? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Expected risk premium

%

Answer 1