Consider the following information about three stocks: Rate of Return If State O

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 .20 .24 .36 .58 Normal .50 .20 .18 .16 Bust .30 .04 .36 .45 a-1 If your portfolio is invested 40 percent each in A and B and 20 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 4.00 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 3.60 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

Therfore ecpected return is 9.78%

Variance Sum( Probaility*( Return -Meanreturn))

S. Deviation = Sqrt(variance)

Risk Premium =9.78%-4% =5.78%

Real return =9.78%-3.60% =6.18%

A B C State of economy 40% 40% 20% Expected return 0.2 0.24 0.36 0.58 35.60% 0.5 0.2 0.18 0.16 18.40% 0.3 0.04 -0.36 -0.45 -21.80% 9.78%

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