Probability of State Economy If your portfolio is invested 30 percent each in A

Question

Probability of State

Economy

If your portfolio is invested 30 percent each in A and B and 40 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.)

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What is the variance? (Do not round intermediate calculations and round your answer to 5 decimal places, e.g., 32.16161.)

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.)

If the expected T-bill rate is 4.80 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.)

If the expected inflation rate is 4.30 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.)

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.)

Explanation / Answer

Stock A Stock B Probability Expected return STOCK A Expected return OF Stock B deviation from mean STOCK A deviation from mean STOCK B square of deviation from mean STOCK A square of deviation from mean*probability Stock A square of deviation from mean STOCK B square of deviation from mean*probability Stock B 0.25 0.3 0.25 6.3% 7.50% -9.90% 1.35% 0.980100% 0.00245025 0.018225% 4.55625E-05 0.22 0.17 0.45 9.9% 7.65% -6.25% 1.50% 0.390625% 0.001757813 0.022500% 0.00010125 0 -0.3 0.3 0.0% -9.00% -16.15% -15.15% 2.608225% 0.007824675 2.295225% 0.006885675 Expected return 16.15% 6.15% Variance 1.203% 0.703% standard deviation-Total risk 10.97% 8.39% standard deviation-Total risk A 10.97% standard deviation-Total risk B 8.39% Stock C Probability Expected return STOCK C deviation from mean STOCK C square of deviation from mean STOCK C square of deviation from mean*probability Stock C 0.56 0.25 14.0% 7.50% 0.562500% 0.00140625 0.14 0.45 6.3% -0.20% 0.000400% 1.8E-06 -0.46 0.3 -13.8% -20.30% 4.120900% 0.0123627 Expected return 6.50% Variance 1.377% standard deviation-Total risk 11.73% Portfolio return is 30%*(Return of stock A + return of stock B)+ 40%*return on stock C 9.29% Similarly Variance and standard devistion of portfolio are Variance 1.12% Standard devieation 10.50% Risk free rate is the interest on T-Bill Risk premium is return on portfolio - risk free rate 4.4900% Real rate of return does not include the inflation Nominal rate of return is the real rate of return + Inflation Rate 9.29% = real rate of return + Inflaiton 4.99% Approximate 4.49% Exact

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