Consider the following information about three stocks:

State of Economy

Probability

Stock A

Stock B

Stock C

Boom

0.20

0.24

0.36

0.55

Normal

0.55

0.13

0.09

0.17

Bust

0.25

0.00

0.28

-0.45

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?