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Item 6

Problem 13-23 Portfolio Returns and Deviations (LO1, 2)

Consider the following information about three stocks:

State of EconomyProbability of State of EconomyRate of Return if State OccursStock AStock BStock CBoom0.220.300.420.58Normal0.460.230.210.19Bust0.320.010.220.50

a-1. If your portfolio is invested 25% each in A and B and 50% 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 4.50%, 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 2.50%, 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%