Consider the following information on three stocks: State of Economy: Probabilit

Question

Consider the following information on three stocks:

State of
Economy: Probability of Rate of Return if State Occurs
State of Economy: Stock A Stock B Stock C
Boom 0.35 0.55 0.45 0.55
Normal 0.6 0.36 0.25 0.04
Bust 0.05 0.3 -0.09 -0.55

(a)
If your portfolio is invested 41 percent each in A and B and 18 percent in C, the portfolio expected return is 33.19 percent, The variance is .0203, and standard deviation is 14.25 percent.


(b)
If the expected T-bill rate is 3.6 percent, the expected risk premium on the portfolio is 29.59 percent


(c)
If the expected inflation rate is 3.3 percent, the approximate and exact expected real returns on the portfolio are ______ percent and ______ percent, respectively. The approximate and exact expected real risk premiums on the portfolio are ______ percent and _______ percent, respectively. (Round your answers to 2 decimal places.)

Explanation / Answer

Approximate real return = nominal rate- inflation rate

(1+Exact real return)(1+inflation rate) = (1+nominal rate)

Portfolio return
Approximate real return = 33.19-3.3 = 29.89%
(1+Exact real return)(1+0.033) = (1+0.3319)

Exact real return = 28.94%

Risk premium
Approximate real return = 29.59-3.3 = 26.29%
(1+Exact real return)(1+0.033) = (1+0.2959)

Exact real return = 25.45%

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.