Consider the following information about three stocks: Probability 0.22 State of Economy Boom Normal Bust 0.53 0.25 Stock A 0.24 0.00 0.17 -0.28 Stock B 0.36 0.13 -0.45 Stock C 0.55 0.09 Instructions: a) If your portfolio is invested 40% each in A and B and 20% in C, what is the portfolio expected return? The variance? The standard deviation? b) If the expected T-bill rate is 3.80%, the expected inflation rate is 3.50% what are the approximate and exact expected real returns on the portfolio? what is the approximate real risk premium? Show your steps.
Consider the following information about three stocks: Probability 0.22 State of Economy Boom Normal Bust 0.53 0.25 Stock A 0.24 0.00 0.17 -0.28 Stock B 0.36 0.13 -0.45 Stock C 0.55 0.09 Instructions: a) If your portfolio is invested 40% each in A and B and 20% in C, what is the portfolio expected return? The variance? The standard deviation? b) If the expected T-bill rate is 3.80%, the expected inflation rate is 3.50% what are the approximate and exact expected real returns on the portfolio? what is the approximate real risk premium? Show your steps.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Consider the following information about three stocks:
Probability
0.22
State of Economy
Boom
Normal
Bust
0.53
0.25
Stock A
0.24
0.00
0.17
-0.28
Stock B
0.36
0.13
-0.45
Stock C
0.55
0.09
Instructions:
a) If your portfolio is invested 40% each in A and B and 20% in C, what is the portfolio expected
return? The variance? The standard deviation?
b) If the expected T-bill rate is 3.80%, the expected inflation rate is 3.50% what are the approximate
and exact expected real returns on the portfolio? what is the approximate real risk premium?
Show your steps.
Expert Solution
Step 1: Key information that is required from the question:
The portfolio is invested 40% each in A and B and 20% in C.
The Risk-free rate is 3.80% and the inflation rate is 3.50%.
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