Consider the following information on a portfolio of three stocks: Required: If

Question

Consider the following information on a portfolio of three stocks: Required: If your portfolio is invested 40 percent each in A and B and 20 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) and input your other answers as a percentage rounded to 2 decimal places (e.g., 32.16).) If the expected T-bill rate is 3.75 percent, what is the expected risk premium on the portfolio? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Explanation / Answer

calculation of expected return on portfolio

expected return of stock A = 0.15*0.02+0.55*0.10+0.30*0.16=10.6%

expected return of stock B=0.15*0.32+0.55*0.12+0.30*-0.11=8.1%

expected return on stock C = 0.15*.60+0.55*0.20+0.30*-0.35=9.5%

expected return on portfolio = 0.4*0.106+0.4*0.081+0.2*0.095=9.38%

calculation of variance and standard deviation

variance = 0.00012536

standard deviation = (variance)1/2=(0.00012536)1/2=0.011196=1.1196%

b) risk premium= expected return on portfolio- risk free rate

= 9.38%-3.75% = 5.63%

stock probability stock expected return (mean-expected return)2 probability *4 th column A 0.4 10.6% 0.00014884 0.000059536 B 0.4 8.1% 0.00016384 0.000065536 C 0.2 9.5% 0.000000144 0.000000288 total variance 0.00012536

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