You have $60,000 to invest and you wish to divide this amount between three securities: $21,000 in
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Question:
You have $60,000 to invest and you wish to divide this amount between three securities: $21,000 in the shares of Firm A, $27,000 in the shares of Firm B, and the remaining part in the risk free asset. You collected the following information:
state of the economy | Probability of occurrence | Share A | Share B | Risk-free Asset | Inflation Rate |
Boom | 0.3 | 0.25 | 0.40 | 0.06 | 0.04 |
Normal | 0.40 | 0.21 | 0.17 | 0.05 | 0.025 |
Bust | 0.30 | 0.08 | -0.20 | 0.04 | 0.02 |
a) What is the expected risk premium on the portfolio? (3 marks)
b) What is the expected real return on the portfolio? (3 marks) Hint: Real return = Return – Inflation
Related Book For
Financial Accounting Tools for Business Decision Making
ISBN: 978-1118644942
6th Canadian edition
Authors: Paul D. Kimmel, Jerry J. Weygandt, Donald E. Kieso, Barbara Trenholm, Wayne Irvine
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