Rate of Return if State Occurs State of Probability of Economy State of Economy

Question

Rate of Return if State Occurs
  State of Probability of
  Economy State of Economy Stock A Stock B Stock C
  Boom 0.22 0.30 0.42 0.58
  Normal 0.46 0.23 0.21 0.19
  Bust 0.32 0.01 ? 0.22 ? 0.50

a-1

If your portfolio is invested 25 percent each in A and B and 50 percent in C, what is the portfolio expected return? (Round your answer 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 final answer to 5 decimal places. (e.g., 32.16161))

  Variance   

a-3

What is the standard deviation? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

  Standard deviation %

b.

If the expected T-bill rate is 4.30 percent, what is the expected risk premium on the portfolio? (Round your answer to 2 decimal places. (e.g., 32.16))

  Expected risk premium %

c-1

If the expected inflation rate is 3.90 percent, what are the approximate and exact expected real returns on the portfolio? (Round your answers 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? (Round your answers to 2 decimal places. (e.g., 32.16))

  
  Approximate expected real risk premium %
  Exact expected real risk premium %

Explanation / Answer

a-1) 10.09%

a-2) .08703

a-3) 29.50%

b) 5.79%

c) approx expected real return- 6.19%

exact expected real return- 5.96%

c-2) approx expected real risk premium- 5.79%

exact expected real risk premium- 5.56%

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