zekeria nawabi Finance 314: Summer 2016 Chapter 13 Homework instructions | help

Question

zekeria nawabi Finance 314: Summer 2016 Chapter 13 Homework instructions | help Question 10 (of 10) Save & Exit Submit 10.value: 10.00 points 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 .35 .40 .52 Normal .50 .17 .15 .13 Bust .25 .01 .32 .40 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 12.225 % a-2 What is the variance? (Do not round intermediate calculations and round your answer to 5 decimal places, e.g., 32.16161.) Variance 0.05364 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 23.16 % b. If the expected T-bill rate is 3.70 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 8.525 % c-1 If the expected inflation rate is 3.30 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:c-1 The approximate expected real return is the expected nominal return minus the inflation rate, so:

Approximate expected real return = .12225– .033 = .08925 or 8.93%

To find the exact real return, we will use the Fisher equation. Doing so, we get:

1 + E(Ri) = (1 + h)[1 + e(ri)]

1.12225= (1.0330)[1 + e(ri)]

e(ri) = (1.12225/1.033) – 1 = .08639 or 8.64%

Answer:c-2 The approximate real risk premium is the expected return minus the risk-free rate, so:

Approximate expected real risk premium = .12225 – .037 = .08525 or 8.53%

The exact expected real risk premium is the approximate expected real risk premium, divided by one plus the inflation rate, so:

Exact expected real risk premium = .08525/1.033 = .08252 or 8.25%

Related Questions

Navigate

• Browse (All)
• Browse Z
• Subjects

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