Please help. The answer I received earlier was completely wrong. If your portfol

Question

Please help. The answer I received earlier was completely wrong.

If your portfolio is invested 36 percent each in A and B and 28 percent in C, the portfolio expected return is _____ percent (Do not include the percent sign (%). Round your answer to 2 decimal places. (e.g., 32.16)). The variance is _______ (Round your answer to 4 decimal places. (e.g., 32.1616)) and standard deviation is _____ percent. (Do not include the percent sign (%). Round your answer to 2 decimal places. (e.g., 32.16))

If the expected T-bill rate is 3.8 percent, the expected risk premium on the portfolio is ____percent. (Do not include the percent sign (%). Round your answer to 2 decimal places. (e.g., 32.16)

If the expected inflation rate is 3.6 percent, the approximate and exact expected real returns on the portfolio are _____ percent and _____ percent, respectively. The approximate and exact expected real risk premiums on the portfolio are ____ percent and ____ percent, respectively. (Do not include the percent signs (%). Round your answers to 2 decimal places. (e.g., 32.16))

Explanation / Answer

A.
The expected return on the portfolio is given beow:
Return of portfolio =summation of(Probability of state of economy* summation of (Weight of stock*Return of stock))
Putting values in the above equation we get
Return if state of economy is boom (probability = 0.45) = 37.8%
Return if state of economy is normal (probability = 0.5) = 14.52%
Return if state of economy is bust (probability = 0.05)= -12.92%

expected return = 23.62 (in%)
Using above values variance = 198.6461
Standard deviation = sqrt(variance) = 14.09 (in %)

B. Expected risk premium = expected return of portfolio- expected T-bill rate
= 23.62-3.8 = 19.82

C. The approximate expected real return is the expected nominal return minus the inflation rate = 23.62-3.6 = 20.02
To find the exact expected real return on the portfolio we will use Fisher Equation. Doing so we get
(1+ Expected return)=(1+ Exact real return)*(1+ inflation rate)
=> 1.2362/ 1.036 - 1= Exact real return
=> Exact real return = 0.1932
or exact real return = 19.32 (in%)

Approximate real risk premium is the expected return minus the risk free rate
Approximate expected real risk premium = 23.62 - 3.8 = 19.82
Exact expected real risk premium = approximate expected risk premium divided by one plus the infaltion rate = 19.82/1.036= 19.13   

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects