Consider the following information about three stocks: Rate of Return If State O
ID: 2724924 • Letter: C
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 .28 .40 .52 Normal .40 .11 .09 .07 Bust .35 .02 .22 .42 a-1 If your portfolio is invested 35 percent each in A and B and 30 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 3.10 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 2.70 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 %
Explanation / Answer
Answer
Answer : a-1
Stock A
State of the Economy
probability
Return
Expected return
A
B
A*B
Boom
0.25
0.28
0.07
Normal
0.4
0.11
0.044
Bust
0.35
0.02
0.007
Expected return
0.121
Stock B
State of the Economy
probability
Return
Expected return
A
B
A*B
Boom
0.25
0.4
0.1
Normal
0.4
0.09
0.036
Bust
0.35
-0.22
-0.077
Expected Return
0.059
Stock C
State of the Economy
probability
Return
Expected return
A
B
A*B
Boom
0.25
0.52
0.13
Normal
0.4
0.07
0.028
Bust
0.35
-0.42
-0.147
Expected return
0.011
Portfolio
Proportion
Expected return (as per above tables)
Weighted Return
A
B
A*B
Stock A
0.35
0.121
0.04235
Stock B
0.35
0.059
0.02065
Stock C
0.3
0.011
0.0033
Expected return of Portfolio
0.0663
Answer : If your portfolio is invested 35 percent each in A and B and 30 percent in C, the portfolio expected return is 0.0663
Stock A
State of the Economy
probability
Return
Expected return
A
B
A*B
Boom
0.25
0.28
0.07
Normal
0.4
0.11
0.044
Bust
0.35
0.02
0.007
Expected return
0.121
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