If your portfolio is invested 44 percent each in A and B and 12 percent in C, wh
ID: 2760317 • Letter: I
Question
If your portfolio is invested 44 percent each in A and B and 12 percent in C, what is the portfolio’s expected return, the variance, and the standard deviation? (Do not round intermediate calculations. Round your variance answer to 5 decimal places (e.g., 32.16161) and input your other answers as a percentage rounded to 2 decimal places (e.g., 32.16).)
If the expected T-bill rate is 4.7 percent, what is the expected risk premium on the portfolio? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
Consider the following information on a portfolio of three stocks:Explanation / Answer
a. Boom: E(RP ) = 0.44(0.11) + 0.44(0.36) + 0.12(0.41) = 0.256
Normal E(RP ) = 0.44(0.19) + 0.44(0.31) + 0.12(0.29) = 0.255
Bust: E(RP ) = 0.44(0.20) + 0.44(-0.30) + 0.12(-0.39) = -0.091
E(RP ) = 0.12(0.256) + 0.51(0.255) + 0.37( -0.091) = 0.127
Variance = 0.12(0.256 - 0.127)2 + 0.51(0.255 - 0.127)2 + 0.37( -0.091 - 0.127)2 = 0.02793
Standard Deviation = [0.02793664]1/2= 0.167
b. Expected Risk premium =E(RP ) - Rf = 0.127 - 0.047 = 0.08