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 0.20 0.38 0.50 0.50 Normal 0.55 0.16 0.14 0.12 Bust 0.25 0.00 ? 0.30 ? 0.50 If your portfolio is invested 30 percent each in A and B and 40 percent in C, what is the portfolio expected return? What is the variance? What is the standard deviation? If the expected T-bill rate is 3.60 percent, what is the expected risk premium on the portfolio? If the expected inflation rate is 3.20 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?

Explanation / Answer

Return on stock A= 16.4% SD= .126 Return on stock B= 25.2% SD B= 14.06% Return on stock C= 29.1% SD= 18.9% portfolio expected return= 23.567%

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