Question

Consider the following information about three stocks: Rate of Return If State Occurs State of Probability of Economy Economy Boom Normal Bust State of Stock B 56 .14 -.46 25 45 .30 25 .22 .30 .30 c-1. If the expected inflation rate is 4.30 percent, what are the approximate and exact expected real returns on the portfolio? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) c-2. What are the approximate and exact expected real risk premiums on the portfolio? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) Consider the following information about three stocks: Rate of Return If State Occurs State of Probability of Economy Economy Boom Normal Bust Stock C .56 .14 46 State of Stock B .30 30 Stock A .25 .22 .25 .45 30 c-2. What are the approximate and exact expected real risk premiums on the portfolio? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

Expected Expected State ofRate of returns if stateWeighted returns ifstat 1economy portfolio | return (r) Probability | [(P(r)] return | [rxP(r)-μ] | occurs (weight«Return) (r-H)A2 occurs r-μ 9.73%) 3 Boom 25% 30% 56%) 7.50% 9.00% 22.40% 38.90% 29.61% 8.77% 2.19% 0.25 14% 4 Normal 22% 0.29% 17% 6.60% 5.10% 5.60% 17.30% 0.45 7.79%) 8.01% 0.64% 5 Recession 0% -30% - 46%) 0.00% -9.00%-18.40% 27.4% 8.22%)-36.69% 13.46% 0.30 4.04% 7 Weights 30% 30% 40% Expected return (u) 9.29% Variance (oA2) 0.06519 Standard deviation (o) 25.53% 12 Portfolio expected return 9.29%)-17 13 14 Variance 0.06519 M8 15 16 Standard deviation (a) 25.53%) M 10 4.49%-17-4.8% 18 Expected risk premium 19 20 Real rate (approx) 21 Real rate (Exact) 4.99%-17-4.3% 4.78%-(1+17)/(1+4.3%)-1 23 Expected real risk premium (approx) 24 Expected real risk premium (Exact) 4.49%-E18 4.28%-(1+17)/(1+4.8%)-1