If your portfolio is invested 40 percent each in A and B and 20 percent in C, wh

Question

  

  

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. 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 3.30 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 2.90 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.)

Consider the following information about three stocks:

Explanation / Answer

Solution:

a-1).

0.24*(-0.45)=(-0.108)

Now,Expected Return of Portfolio= (0.40*0.1578) + (0.40*0.1094) +(0.20*0.0826)

=0.1234

=12.34%

a-2 & 3).

Variance for stock A = 0.26*(0.32-0.1578)^2 +0.50*(0.13-0.1578)^2 + 0.24*(0.04-0.1578)^2 =0.0105

Standard Deviation for stock A = 0.102

Variance for Stock B = 0.26*(0.44-0.1094)^2 +0.50*(0.11-0.1094)^2 +0.24*(-0.25-0.1094)^2 =0.0594

Standard Deviation for stock B = 0.243

Variance for Stock C = 0.26*(0.56-.0826)^2+0.50*(0.09-0.0826)^2+0.24*(-0.45-0.0826)^2 =0.08650

Standard deviation for stock C =0.294

40% 40% 20% State of Economy Probability A E(R) B E(R) C E(R) Boom 0.26 0.32 0.26*0.32=0.0832 0.44 0.26*0.44=0.1144 0.56 0.26*0.56=0.1456 Normal 0.50 0.13 0.50*0.13=0.065 0.11 0.50*0.11=0.055 0.09 0.50*0.09=0.045 Bust 0.24 0.04 0.24*0.04=0.0096 -0.25 0.24*(-0.25)=(-0.06) -0.45

0.24*(-0.45)=(-0.108)

Expected return of stock 0.1578 0.1094 0.0826

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