2. You have $128,000 to invest and you wish to divide this amount between three securities: $48,000 in the shares of Firm A, $38,400 in the shares of Firm B, and the remaining part in the risk free asset. You collected the following information:

3. 1. 		Return if the state occurs
      State of the economy	Probability of Occurrence	Share A	Share B	Risk-free asset	Inflation rate
      Boom	0.05	0.25	0.35	0.06	0.040
      Normal	0.65	0.18	0.14	0.04	0.025
      Recession	0.30	-0.06	-0.15	0.02	0.010

      a) What is the expected return on the portfolio? (7 marks)

   2. b) What is the standard deviation of the return on the portfolio? (4 marks)

   3. c) What is the expected risk premium on the portfolio? (3 marks) Hint: The expected risk premium on the portfolio is the expected return on the portfolio minus the expected risk free rate

   4. d) What is the expected real return on the portfolio? (3 marks) Hint: The expected real return on the portfolio is the expected return on the portfolio minus the expected inflation rate