Portfolio Returns and Deviations Consider the following information about three

Question

Portfolio Returns and Deviations Consider the following information about three stocks: If your portfolio is invested 40 percent each in A and B and 20 percent in C, What is the portfolio expected return? The variance? The standard deviation? If the expected T-bill rate is 3.80 percent, what is the expected risk premium on the portfolio? 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?

Explanation / Answer

Expected return = expcted return * probability   

which comes to 10.65%

Variance and stadard devitaion

As in thre formula

Vairnance is 0.39%

Standard Deviation = 6.21%

Expecte riks premium on portfolio = 10.65% -3.80% = 6.85%

Expecte real returns = 10.65% - 3.50% = 7.15%

Expected real risk free premium = 7.15% - 3.5% = 3.65%

A B C Probaility 40% 40% 20% Expected return 0.25 0.2 0.25 0.6 30.00% 0.55 0.15 0.11 0.05 11.40% 0.2 0.01 -0.15 -0.5 -15.60% 10.65%

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