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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 | .13 | .04 | .34 | .58 |
Normal | .53 | .12 | .14 | .22 |
Bust | .34 | .18 | –.13 | –.37 |
a. |
If your portfolio is invested 36 percent each in A and B and 28 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. Enter your other answers as a percent rounded to 2 decimal places, e.g., 32.16.) |
b. | If the expected T-bill rate is 3.85 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.) |
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