If your portfolio is invested 40 percent each in A and B and 20 percent in C, wh
ID: 2765601 • Letter: I
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 4.60 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 4.10 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
a-1.
Portfolio Expected return (Boom) = (0.40*0.36) + (0.48 * 0.40) + (0.52*0.20) = 0.44
Portfolio Expected return (Normal) = (0.40*0.20) + (0.40*0.15) + (0.20*0.12) = 0.164
Portfolio Expected return (Bust) = (0.40*0.04) + (0.40 * -0.26) + (0.20* -0.44) = -0.176
Expected return of portfolio = (0.25*0.44) + (0.44*0.164) + (0.31* -0.176) = 0.1276 = 12.76%
a-2
Variance = 0.25*(0.44-0.1276)2 + 0.44*(0.164-0.1276)2 + 0.31(-0.176-0.1276)2 = 0.05356
a-3
Standard deviation = Square root of variance = Square root of 0.05356 = 0.2314 = 23.14%
b.
Risk premium = Expected return – Risk free rate of return = 0.1276 – 0.0460 = 0.0816 = 8.16%
c-1.
Expected real return = 0.1276 – 0.0410 = 0.0866 = 8.66%
c-2.
Expected real risk premium = 0.0816 – 0.0410 = 0.0466 = 4.66%