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 .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 % 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 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 % 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

a1. Expected rerturn in Boom = 0.35*0.35 + 0.35* 0.4 +0.30*0.52 = 0.4185

Expected return in Normal = 0.35* 0.17 + 0.35*0.15 + 0.3*0.13 = 0.151

Expected return in Bust = 0.35*0.01 + 0.35*-0.32 + 0.30*-0.41 = -0.2315

Expected return of portfolio =  0.4185*0.25 + 0.50*0.151 0.25*-0.2315 = 0.12225 = 12.225%

a2. The varaince is as caclulated as follows:

Variance = 0.05364

a3: Standard deviation = 23.16% (as shown in the table)

b: If the T- bill rate is 3.70%, the risk premium = 12.225% - 3.70% = 8.525%

Note: We have answered 4 sub-parts Kindly re-post the questions with remaining subparts for experts to answer

Economy Prob P Return R R - E ( R ) [R - E ( R )]^2 [R - E ( R )]^2 * P Boom 0.25 0.4185 0.29625 0.087764063 0.021941016 Normal 0.5 0.151 0.02875 0.000826563 0.000413281 Bust 0.25 -0.2315 -0.35375 0.125139063 0.031284766 Expected return E ( R ) 0.12225 Variance 0.053639063 Std. deviation 23.16%

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