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Given the following probability distributions for returns on stocks A, B, and C: Probability Return Return Return State of Outcome on Stock A on Stock
Given the following probability distributions for returns on stocks A, B, and C: Probability Return Return Return State of Outcome on Stock A on Stock B on Stock C 1 0.15 20% 20% 5% 2 0.35 15% 10% 10% 3 0.35 10% 15% 15% 4 0.15 5% 5% 20% You invest $5,000 of your own money in a portfolio composing of these three stocks. (a) You take a long position of $4.000 in A, a long position of $3,000 in B, and a position of $ in C. Calculate the expected rate of return and standard deviation of your 3-stock portfolio. (b) Assume that the inflation rate and risk free rate are, respectively, 2% and 2.5%, calculate the expected real rate of return, and the REAL risk premium, of your 3-stock portfolio constructed in part (a). Use the approximation version of the Fisher Equation in your calculations! (b) Assume that the inflation rate and risk free rate are, respectively, 2% and 2.5%, calculate the expected real rate of return, and the REAL risk premium, of your 3-stock portfolio constructed in part (a). Use the approximation version of the Fisher Equation in your calculations!
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