Problem 11-22 Portfolio Returns and Deviations

Consider the following information about three stocks:

				Rate of Return if State Occurs
State of	Probability of
Economy	State of Economy			Stock A			Stock B			Stock C
Boom		.30			.20			.25			.60
Normal		.45			.15			.11			.05
Bust		.25			.01			.15			.50

a-1.	If your portfolio is invested 40 percent each in A and B and 20 percent in C , what is the portfolio expected return? (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16))

Portfolio expected return

%

a-2.	What is the variance? (Do not round intermediate calculations and round your final answer to 5 decimal places. (e.g., 32.16161))

Variance

a-3.	What is the standard deviation? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Standard deviation

%

b.	If the expected T-bill rate is 3.80 percent, what is the expected risk premium on the portfolio? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Expected risk premium

%

c-1.	If the expected inflation rate is 3.50 percent, what are the approximate and exact expected real returns on the portfolio? (Do not round intermediate calculations and round your answers to 2 decimal places. (e.g., 32.16))

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 and round your answers to 2 decimal places. (e.g., 32.16))

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