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
(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?
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