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 .22 .30 .42 .58 Normal .46 .23 .21 .19 Bust .32 .01 .22 .50 a-1 If your portfolio is invested 25 percent each in A and B and 50 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 4.30 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 3.90 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

a1. Expected return in Boom = 0.25*0.3 + 0.25*0.42 + 0.5*0.58 = 0.47

Expected return in Normal = 0.25*0.23 + 0.25*0.21 + 0.5*0.19 = 0.205

Expected in Bust = 0.25* 0.01 + 0.25*-0.22 + 0.5*-0.5 = -0.3025

Expected porfolio return = 0.47*0.22 + 0.46*0.205 + 0.32*-0.3025 = 0.1009 = 10.09%

a2. The variance is as shown below:

Variance = 0.087

a3- Std. deviation : 29.50%

b if the T- bill rate = 4.30%, then the risk premium = 10.09 - 4.30 = 5.79%

Note:We have answered 4 sub-parts of the questions. Kindly repost the remaining for experts to answer

Economy Prob P Return R R - E ( R ) [R - E ( R )]^2 [R - E ( R )]^2 * P Boom 0.22 0.47 0.3691 0.13623481 0.029971658 Normal 0.46 0.205 0.1041 0.01083681 0.004984933 Bust 0.32 -0.3025 -0.4034 0.16273156 0.052074099 Expected return E ( R ) 0.1009 Variance 0.08703069 Std. deviation 29.50%

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