1) If your portfolio is invested 38 percent each in A and B and 24 percent in C,

Question

1) If your portfolio is invested 38 percent each in A and B and 24 percent in C, what is the portfolio’s expected return, the variance, and the standard deviation? (Do not round intermediate calculations. Round your variance answer to 5 decimal places (e.g., 32.16161) and input your other answers as a percentage rounded to 2 decimal places (e.g., 32.16).)

2) If the expected T-bill rate is 4.3 percent, what is the expected risk premium on the portfolio? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Explanation / Answer

1)

Boom : E(Rp) = 0.38(0.03) + 0.38(0.33) + 0.24(0.49) = 0.2544 or 25.44%

Normal:E(Rp) = 0.38(0.11) + 0.38(0.23) + 0.24(0.21) = 0.1796 or 17.96%

Bust:E(Rp) = 0.38(0.17) + 0.38(-0.22) + 0.24(-0.36) = -0.1054 or -10.54%

E(Rp) = 0.12(0.2544) + 0.54(0.1796) + 0.34(-0.1054) = 0.0916 or 9.16%

Varience = 0.12(0.2544 - 0.0916)2 + 0.54(0.1796 - 0.0916)2 + 0.34(-0.1054 - 0.0916)2 =

= 0.00318 + 0.00418 + 0.0131 = 0.02046 or 2.046%

Standard deviation = (0.02046)1/2 = 0.1430 or 14.30%

2)

Expected risk premium = E(Rp) – R

Expected risk premium = 0.0916 - 0.043 = 0.0486 or 4.86%

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