Consider the following information about three stocks: Rate of Return If State O
ID: 2769712 • Letter: C
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 .26 .32 .44 .56 Normal .50 .13 .11 .09 Bust .24 .04 .25 .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 3.30 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 2.90 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
Answer
Answer a-1
Economy
Probability
Stock A
Expected return
A
B
A*B
Boom
0.26
0.32
0.0832
Normal
0.5
0.13
0.065
Bust
0.24
0.04
0.0096
Expected return
0.1578
Economy
Probability
Stock B
Expected return
A
B
A*B
Boom
0.26
0.44
0.1144
Normal
0.5
0.11
0.055
Bust
0.24
-0.25
-0.06
Expected return
0.1094
Economy
Probability
Stock C
Expected return
A
B
A*B
Boom
0.26
0.56
0.1456
Normal
0.5
0.09
0.045
Bust
0.24
-0.45
-0.108
Expected return
0.0826
Portfolio
Proportion
Expected Return
Weighted return
A
B
A*B
Stock A
0.4
0.1578
0.06312
Stock B
0.4
0.1094
0.04376
Stock C
0.2
0.0826
0.01652
Expected return (Portfolio)
0.1234
Answer : If your portfolio is invested 40 percent each in A and B and 20 percent in C, the portfolio expected return is 0.1234
Economy
Probability
Stock A
Expected return
A
B
A*B
Boom
0.26
0.32
0.0832
Normal
0.5
0.13
0.065
Bust
0.24
0.04
0.0096
Expected return
0.1578
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