a. if your portfolio is invested 40 persent each in A and B and 20 percent in C,
ID: 2649347 • Letter: A
Question
a. if your portfolio is invested 40 persent each in A and B and 20 percent in C, what is the portfolio expected return? the variance? the standard deviation?
b. if the expected T-bill rate is 3.80 percent, what is the expected risk premium on the portfolio?
c. if the expected inflation rate is 3.50 percent, what are the approximate and exact expected real returns on the portfolio? what are the approximate and exact expected real risk premiums on the portfolio?
state of economy probability return on A return on B return on C boom 0.4 .20 .35 .60 normal .30 .15 .12 .05 bust .30 .01 -.25 -.50Explanation / Answer
Answer:(a)
Boom:E(Rp)=0.40(0.20)+0.40(0.35)+0.20(0.60)=0.34
Normal: E(Rp)=0.40(0.15)+0.40(0.12)+0.20(0.05)=0.118
Bust: E(Rp)=0.40(0.01)+0.40(-0.25)+0.20(-0.50)=-0.196
E(Rp)=0.40(0.34)+0.30(0.118)+0.30(-0.196)=0.1126
Variance of portfolio=[0.40(0.34-0.1126)2+0.30(0.118-0.1126)2+0.30(-0.196-0.1126)2]=0.04926324
Standard deviation of the portfolio=square root of variance of portfolio
=square root of 0.04926324
=0.2219532
Answer:(b) Calculation of the expected risk premium on the portfolio:
Risk premium=E(Rp)-Rf
=0.1126-0.038
=0.0746
Answer:(c) Calculation of the approximate and exact expected real returns on the portfolio:
Expected Real return=0.1126-0.035=0.0776
Expected real risk premiums=Risk premium-Inflation rate
=0.0746-0.035=0.0396
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.