Problem 11-22 Portfolio Returns and Deviations If your portfolio is invested 40
ID: 2757270 • Letter: P
Question
Problem 11-22 Portfolio Returns and Deviations
If your portfolio is invested 40 percent each in A and B and 20 percent in C , what is the portfolio expected return? (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16))
What is the variance? (Do not round intermediate calculations and round your final answer to 5 decimal places. (e.g., 32.16161))
What is the standard deviation? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
If the expected T-bill rate is 3.80 percent, what is the expected risk premium on the portfolio? (Do not round intermediate calculations and round your final answer 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 and round your answers 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 and round your answers to 2 decimal places. (e.g., 32.16))
Consider the following information about three stocks:
Explanation / Answer
A1.Portfolio expected return- Above the table-Boom=0.3,normal=.114,Bust=-0.156
A2 Standand Deviation(E(RP)=0.3(.3)+.45(.114)+.25(-0.156)=0.1023
portfoli=.3(.3-.1023)^2+..45(.114-.1023)^2+.25(-0.156-.1023)^2=0.1585
A3 Variance= SD2=(0.1585)^2=.0251
B1 Risk premium=E(rp)-Rf=0.1023-.038=0.643
C1--Expected real return=0.1023-.035=0.673
C2-Expected real risk premium=0.643-.035=0.608
Rate of return if state occurs Prob. Of State of economy Stock A Stock B Stock C Expeted return prob sub total prob sub total sub total total Boom 0.3 0.4 0.2 0.08 0.4 0.25 0.1 0.2 0.6 0.12 0.3 Normal 0.45 0.4 0.15 0.06 0.4 0.11 0.044 0.2 0.05 0.01 0.114 Bust 0.25 0.4 0.01 0.004 0.4 -0.15 -0.06 0.2 -0.5 -0.1 -0.156