If your portfolio is invested 45 percent each in A and B and 10 percent in C, wh

Question

If your portfolio is invested 45 percent each in A and B and 10 percent in C, what is the portfolio expected return? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

What is the variance? (Do not round intermediate calculations and round your answer to 5 decimal places, e.g., 32.16161.)

What is the standard deviation? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

If the expected T-bill rate is 3.90 percent, what is the expected risk premium on the portfolio? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

If the expected inflation rate is 3.50 percent, what are the approximate and exact expected real returns on the portfolio? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

What are the approximate and exact expected real risk premiums on the portfolio? (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

Explanation / Answer

If your portfolio is invested 45 percent each in A and B and 10 percent in C, what is the portfolio expected return

Boom:E(Rp) = 0.45(0.22)+0.45(0.34)+0.10(0.56) = .308 = 30.80%

Normal:E(Rp) = 0.45(0.19)+0.45(0.17)+0.10(.15) = 0.177 = 17.70%

Bust:E(Rp) = 0.45(0.3)+0.45(-0.35)+.10(-0.44) = -0.0665 =- 6.65%

Expected Return of Portfolio = 0.25(.308)+0.48(0.177)+0.27(-0.0665) = 0.144005 = 14.40%

a-2 .What is the variance

Variance = 0.25(0.308-0.14400)^2+0.48(0.177-0.14400)^2+0.27(-0.0665-0.14400)^2 = 0.019210487 =0.0192

a-3. Standard deviation

Standard deviation = (0.019210487)^1/2 = 0.1386 =13.86%

b.If the expected T-bill rate is 3.90 percent, what is the expected risk premium on the portfolio?

RPi = E(Rp)-Rf = 0.144005-0.039 = 0.1050 = 10.50%

Expected risk premium = 10.50%

c.If the expected inflation rate is 3.50 percent, what are the approximate and exact expected real returns on the portfolio?

Approximate Expected real retrun = 0.144005 - 0.035 = 0.1009005 = 10.90%

Exact Real return(Use fisher Eq)

1+E(ri) = (1+h)[1+e(ri)]

1+0.144005 = (1.0350)[1+e(ri)]

1.144005 /1.035-1 = e(ri) = 10.53%

c-2

  Approximate expected real risk premium = 0.144005-0.039 = 0.1050 = 10.50%

Exact expected real risk premium = Approximate expected real risk premium /(1+infaltion rate) = 0.1050/1.035 = 0.10144 = 10.14%

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