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		.20			.28			.40			.56
Normal		.45			.22			.20			.18
Bust		.35			.00			−.20			−.48

  

a-1	If your portfolio is invested 30 percent each in A and B and 40 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 4.20 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 3.80 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