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Following is the information on a portfolio of 3 stocks held by Bay Street Investment Management Inc.: State of Economy Probability Boom 0.20 Normal
Following is the information on a portfolio of 3 stocks held by Bay Street Investment Management Inc.: State of Economy Probability Boom 0.20 Normal 0.50 Bust 0.30 Salma Ltd Rate Aleena Corp Rate of Return of Return Ayra Inc Rate of Return 20% 40% 100% 15 20 50 10 -20 -80 1. If Bay Street's portfolio is invested 50% in Salma, 25% in Aleena, and 25% in Ayra, what is the portfolio expected return? The variance? The standard deviation? 2. If the expected T-Bill rate is 4%, what is the expected risk premium on the portfolio? 3. If the expected inflation rate is 2%, what is the expected real return on the portfolio? What is the expected real risk premium on the portfolio? 4. What is the required rate of return on the portfolio, if the market risk premium is 6%, and portfolio beta is 1.8? 5. According to your calculation in Part (1) and Part (4), is this portfolio correctly priced? If not, is this portfolio overpriced or underpriced? What will happen to prices and expected returns of mispriced assets in this portfolio subsequently?
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