Task: Portfolio Returns and Deviations
Consider the following information about three stocks:
|
State of Economy
|
Probability of State of Economy
|
Rate of Return if State Occurs
|
|
Stock A
|
Stock B
|
Stock C
|
|
Boom .4 .20 .35 .60
|
.4
|
.20
|
.35
|
.60
|
|
Normal .4 .15 .12 .05
|
.4
|
.15
|
.12
|
.05
|
|
Bust .2 .01 -.25 -.50
|
.2
|
.01
|
-.25
|
-.50
|
Question 1: If your portfolio is invested 40% each in A and B and 20% in C, what is the portfolio expected return? The variance? The standard deviation?
Question 2: If the expected T-bill rate is 3.8%, what is the expected risk premium on the portfolio?