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 .25 .30 .56 Normal .45 .22 .17 .14 Bust .30 .00 .30 .461

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.) Approximate expected real return % Exact expected real return %

Explanation / Answer

Condition of market Probability Return on A Return on B Return on C BOOM 25.00% 25% 30% 56% Normal 45% 22% 17% 14% Bust 30% 0% -30% -46% Return 16.150% 6.150% 17.080% Inflation Rate 4.30% 4.30% 4.30% Real Return 11.850% 1.850% 12.780% Real return is portfolio return - inflation

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