Portfolio Returns and Deviations Consider the following information about three equities:

Rate of return if state occurs State of economy Probability of state of economy Equity A

Equity B

Equity C

Boom 0.25 0.24 0.36 0.55 Good 0.50 0.17 0.13 0.09 Bust 0.25 0.00 ?0.28 ?0.45

(a) If your portfolio is invested 40 per cent each in A and B and 20 per cent in C, what is the portfolio expected return? The variance? The standard deviation?

(b) If the expected T-bill rate is 3.80 per cent, what is the expected risk premium on the portfolio?

(c) If the expected inflation rate is 3.50 per cent, 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?