Consider the following information on three stocks: Rate of Return if State

Consider the following information on three stocks:

Rate of Return if State Occurs

State of Economy / Probability / Stock A / Stock B / Stock C

Boom / 0.4 / 0.2 / 0.35 / 0.6

Normal /0.3 / 0.15 / 0.12 / 0.05

Bust /0.3 /0.01 / -0.25 /-0.5

(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 3.8% what is the expected risk premium on the

portfolio?

(c) If the expected inflation rate is 3.5% what are the approximate and exact expected

real returns on the portfolio? What are the approximate and exact expected real

risk premiums on the portfolio?