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Consider the following information on three stocks.

Rate of Return if State Occurs

State of economy Probability of state of economy Stock A Stock B Stock C

Boom 0.5 0.2 0.35 0.6

Normal 0.3 0.15 0.12 0.05

Bust 0.2 0.01 -0.25 -0.5

a. If your portfolio is invested 40% each in A and C, and 20% in B, what is the portfolio expected return?

b. What is the variance of this portfolio?

c. What is the standard deviation of this portfolio?

d. If the expected T-Bill rate is 5%, what is the expected risk premium on the portfolio?

e. If the expected inflation rate is 2.50%, what are the approximate and exact expected real returns on the portfolio?

f. If the expected T-Bill rate is 5% and the expected inflation rate is 2.50%, what are the approximate and exact expected real risk premiums on the portfolio?

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M938201

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