If your portfolio is invested 44 percent each in A and B and 12 percent in C, wh

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 4.2 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).)

Explanation / Answer

Boom:E(R)=(44%*11%)+(44%*36%)+(12%*51%)=26.8%
Normal :E(r)=(44%*19%)+(44%*21%)+(12%*29%)=21.08%
Bust:E(R)=(44%*20%)+(44%*-20%)+(12%*-39%)=-4.68%

Total return=(14%*26.8%)+(51%*21.08%)+(35%*-4.68%)=12.86%
Var=14%*(26.8%-12.86%)^2+51%*(21.08%-12.86%)^2+35%*(-4.68%-12.86%)^2=1.352%
Std=1.352%^.5=0.116285

Expected risk premium=12.86%-4.2%=8.66%

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