Problem:
Consider the following information on three stocks.
|
Rate of Return if State Occurs
|
|
State of economy
|
Probability of state of economy
|
Stock A
|
Stock B
|
Stock C
|
|
Boom
|
0.5
|
0.2
|
0.35
|
0.6
|
|
Normal
|
0.3
|
0.15
|
0.12
|
0.05
|
|
Bust
|
0.2
|
0.01
|
-0.25
|
-0.5
|
a. If your portfolio is invested 40% each in A and C, and 20% in B, what is the portfolio expected return?
b. What is the variance of this portfolio?
c. What is the standard deviation of this portfolio?
d. If the expected T-Bill rate is 5%, what is the expected risk premium on the portfolio?
e. If the expected inflation rate is 2.50%, what are the approximate and exact expected real returns on the portfolio?
f. If the expected T-Bill rate is 5% and the expected inflation rate is 2.50%, what are the approximate and exact expected real risk premiums on the portfolio?
Extra Information about Question:
This question basically belongs to Finance and it describes about computing the expected return of the portfolio, the variance, the standard deviation and expected real risk premium of the portfolio have been computed in the solution.