Consider the following information on three stocks.
Rate of Return if State Occurs
State of economy Probability of state of economy Stock A Stock B Stock C
Boom 0.5 0.2 0.35 0.6
Normal 0.3 0.15 0.12 0.05
Bust 0.2 0.01 -0.25 -0.5
a. If your portfolio is invested 40% each in A and C, and 20% in B, what is the portfolio expected return?
b. What is the variance of this portfolio?
c. What is the standard deviation of this portfolio?
d. If the expected T-Bill rate is 5%, what is the expected risk premium on the portfolio?
e. If the expected inflation rate is 2.50%, what are the approximate and exact expected real returns on the portfolio?
f. If the expected T-Bill rate is 5% and the expected inflation rate is 2.50%, what are the approximate and exact expected real risk premiums on the portfolio?