Consider the following information on a portfolio of three stocks: State of Probability of Stock A...
Consider the following information on a portfolio of three stocks:
| State of | Probability of | Stock A | Stock B | Stock C | ||||||||
| Economy | State of Economy | Rate of Return | Rate of Return | Rate of Return | ||||||||
| Boom | .14 | .11 | .36 | .51 | ||||||||
| Normal | .51 | .19 | .21 | .29 | ||||||||
| Bust | .35 | .20 | − | .20 | − | .39 | ||||||
a. If your portfolio is invested 44 percent each in A and B and 12 percent in C, what is the portfolio’s expected return, the variance, and the standard deviation?
| Expected return | % | |
| Variance | ||
| Standard deviation | % | |
b. If the expected T-bill rate is 4.2 percent, what is the expected risk premium on the portfolio?
Expected risk premium %
Homework Answers
![K3 State of Rate of returns if Weighted returns if state occurs (WeightxReturn) Expected Probability Expected return 1 econom state occurs olio return [(P(r)] 3 Boom 4 Normal 5 Recession | 20%-20%-39%) 8.80% 11% 19% 36% 21% 51% 29% 4.84% 8.36% 15.84% 9.24% 8.80% 6.12% 3.48% -4.68% 26.80% 21.08% -4.68% 0.14 0.51 0.35 3.75%) 13.94% 10.75% 8.22% 1.64%)-17.54% 1.94% 0.67% 3.08% 0.27% 0.34% 1.08% 7 Weights 44% 44% 12% Expected return (H) 12.86% Variance (gA2 0.01693 Standard deviation (ơ 13.01% 12 Portfolio expected return 13 14 Variance 12.86% 0.01693 16 Standard deviation (o) 17 18 Expected risk premium 13.01% 8.66% 17-4.2%](http://img.homeworklib.com/questions/0ae256c0-3d1d-11ea-9336-5fd2d6b5a709.png?x-oss-process=image/resize,w_560)
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