Question

- Risk and Returni Saved 7 Consider the following information on a portfolio of three stocks: Probability of State of Economy State of Stock A Stock B Stock C Economy Rate of Return Rate of Return Rate of Return Вoom 14 09 .34 43 Normal .53 17 29 27 33 Bust 18 -28 -37 Вook a. If your portfolio is invested 36 percent each in A and B and 28 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. Enter your other answers as a percent rounded to 2 decimal places, e.g., 32.16.) b. If the expected T-bill rate is 4.6 percent, what is the expected risk premium on the portfolio? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Hint Print erences a. Expected return Variance Standard deviation b. Expected risk premium 96

Answer 1

State Portfolio Return
Boom =36%*0.09+36%*0.34+28%*0.43=0.2752

Normal =36%*0.17+36%*0.29+28%*0.27=0.2412

Bust =36%*0.18+36%*(-0.28)+28%*(-0.37)=-0.1396

Expected return=0.14*0.2752+0.53*0.2412+0.33*(-0.1396)=12.02960%

Variance=0.14*(0.2752-12.02960%)^2+0.53*(0.2412-12.02960%)^2+0.33*(-0.1396-12.02960%)^2=0.033396914

Standard deviation=sqrt(0.033396914)=18.27482%

Expected risk premium=12.02960%-4.6%=7.42960%