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Question 3 Your employer has asked you to investigate the firm's portfolio risk and return. The portfolio comprises three stocks. It is invested 50 percent
Question 3 Your employer has asked you to investigate the firm's portfolio risk and return. The portfolio comprises three stocks. It is invested 50 percent in stock A, 30 percent in stock B and 20 percent in stock C. You gathered the following information: TABLE 1. Fim Portfolio Data - Expected retums on component stocks (%) in function of the state of the economy State of the Probability of State of Rate of Return (%) for each State of the Economy Economy the Economy Stock A Stock B Stock C Good 60.00% 3.00% 34.00% 70.00% Poor 40.00% 15.00% -12.00% -35.00% (a) Determine what is the portfolio's expected return. (8 marks) (b) Determine the portfolio's variance and standard deviation. (8 marks) (c) Assume that the expected risk-free rate is 2.75 percent. Determine the expected risk premium on the portfolio. (4 marks)
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