STATE OF ECONOMY PROBABILITY OF STATE OF ECONOMY RATE OF RETURN IF STATE OCCURS STOCK A STOCK B STOCK C

BOOM .25 .21 .36 .55

NORMAL .60 .17 .13 .09

BUST .15 .00 -.28 -.45

a. If your portfolio is invested 40 percent each in A and B and 20 percent in C, what is the portfolios 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 risk premums on the portfolio?