Question

onsider 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		0.20			0.20			0.32			0.54
Normal		0.45			0.18			0.16			0.14
Bust		0.35			0.02			−0.34			−0.42

a-1. If your portfolio is invested 40% each in A and B and 20% in C, what is the portfolio expected return? (Do not round intermediate calculations. Enter the answer as a percent rounded to 2 decimal places.)

Portfolio expected return             %

a-2. What is the variance? (Do not round intermediate calculations. Round the final answer to 8 decimal places.)

Variance            

a-3. What is the standard deviation? (Do not round intermediate calculations. Enter the answer as a percent rounded to 2 decimal places.)

Standard deviation             %

b. If the expected T-bill rate is 4.00%, what is the expected risk premium on the portfolio? (Do not round intermediate calculations. Enter the answer as a percent rounded to 2 decimal places.)

Expected risk premium             %

c-1. If the expected inflation rate is 2.00%, what are the approximate and exact expected real returns on the portfolio? (Do not round intermediate calculations. Enter the answers as a percent rounded to 2 decimal places.)

Approximate expected real return	%
Exact expected real return	%

c-2. What are the approximate and exact expected real risk premiums on the portfolio? (Do not round intermediate calculations. Enter the answers as a percent rounded to 2 decimal places.)

Approximate expected real risk premium	%
Exact expected real risk premium	%

Answer 1

A B с D E F G H J K 1 2 3 4 5 6 7 8 Expected Returns 9 Variance 10 Standard Deviation 11 Expected Risk Premium 12 Approximate real returns 13 Exact real returns Prob 0.2000 0.4500 0.3500 А (R-Mean)^2 B (R-Mean)^2 C (R-Mean)^2 Portfolio (R-Mean)^2 0.2000 0.0052 0.3200 0.0918 0.5400 0.2663 0.3160 0.0641 0.1800 0.0027 0.1600 0.0204 0.1400 0.0135 0.1640 0.0102 0.0200 0.0117 -0.3400 0.1274 -0.4200 0.1971 -0.2120 0.0755 12.8000% 1.7000% 2.4000% 6.28% 0.006336 0.072171 0.128304 4.39% 7.9599% 26.8647% 35.8195% 20.94% 2.28% 4.28% 4.20% 14 Approximate real risk premium 15 Exact real risk premium 16 0.28% 2.24%

A B C D E F H 1 1 ProbA 0.2 0.2 0.45 0.18 (R-Mean)^2 B = (C5-C$8)^2 0.32 =(C6-C$8)^2 0.16 = (C7-C$8)^2 -0.34 =SUMPRODUCT($B$5:$B$7,65:E7) =SUMPRODUCT($B$5:$B$7,F5:F7) =SQRT(E9) 0.35 0.02 (R-Mean)^2 =(E5-E$8)^2 0.54 =(E6-E$8)^2 0.14 =(E7-E$8)^2 -0.42 =SUMPRODUCT($B$5:$B$7,65:67) =SUMPRODUCT($B$5:$B$7,H5:47) =SQRT(69) (R-Mean)^2 =(15-1$8)^2 =(16-1$8)^2 =(17-1$8)^2 =SUMPRODUCT($B$5:$B$7,C5:07) =SUMPRODUCT($B$5:$B$7,05:07) =SQRT(09) 8 Expected Returns Variance 10 Standard Deviation 11 Expected Risk Premium 12 Approximate real returns 13 Exact real returns (R-Mean)^2 Portfolio =(G5-G$8)^2 =C5*40%+E5*40%+G5*20% =(G6-G$8)^2 =C6*40%+E6*40%+G6*20% =(G7-G$8)^2=C7*40%+E7*40%+G7*20% =SUMPRODUCT($B$5:$B$7,15:17) =SUMPRODUCT($B$5:$B$7,15:37) =SQRT(19) =18-4% =18-2% =(1+18)/(1+2%)-1 14 Approximate real risk premium 15 Exact real risk premium =111-(4%-2%) =113-(1+4%)/(1+2%)+1