Portfolio Returns and Deviations Consider the following information about three stocks: State of Probability of Rate of

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

State of Probability of Rate of Return If State Occurs Economy State of Economy Stock A Stock B Stock C Boom .4 .20 .35 .60 Normal .4 .15 .12 .05 Bust .2 .01 .25 .50

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

b. If the expected T-bill rate is 3.80 percent, what is the expected risk premium on the portfolio?

c. If the expected inflation rate is 3.50 percent, 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? LO.1

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