Problem 11-25 Portfolio Returns and Deviations [LO 2]
Consider the following information on a portfolio of three stocks:
State of
Economy Probability of
State of Economy Stock A
Rate of Return Stock B
Rate of Return Stock C
Rate of Return Boom .13 .02 .32 .50 Normal .55 .10 .22 .20 Bust .32 .16 â.21 â.35
Required: (a) If your portfolio is invested 40 percent each in A and B and 20 percent in C, what is the portfolioâs expected return, the variance, and the standard deviation? (Do not round intermediate calculations. Round your variance answer to 5 decimal places (e.g., 32.16161) and input your other answers as a percentage rounded to 2 decimal places (e.g., 32.16).)
Expected return % Variance Standard deviation %
(b) If the expected T-bill rate is 4.25 percent, what is the expected risk premium on the portfolio? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
Expected risk premium %
Problem 11-25 Portfolio Returns and Deviations [LO 2]
| Consider the following information on a portfolio of three stocks: |
| State of Economy | Probability of State of Economy | Stock A Rate of Return | Stock B Rate of Return | Stock C Rate of Return |
| Boom | .13 | .02 | .32 | .50 |
| Normal | .55 | .10 | .22 | .20 |
| Bust | .32 | .16 | â.21 | â.35 |
| Required: | |
| (a) | If your portfolio is invested 40 percent each in A and B and 20 percent in C, what is the portfolioâs expected return, the variance, and the standard deviation? (Do not round intermediate calculations. Round your variance answer to 5 decimal places (e.g., 32.16161) and input your other answers as a percentage rounded to 2 decimal places (e.g., 32.16).) |
| Expected return | % |
| Variance | |
| Standard deviation | % |
| (b) | If the expected T-bill rate is 4.25 percent, what is the expected risk premium on the portfolio? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) |
| Expected risk premium | % |
Related questions
Consider the following information:
| Rate of Return If State Occurs | ||||||
| State of | Probability of | |||||
| Economy | State of Economy | Stock A | Stock B | Stock C | ||
| Boom | .20 | .355 | .455 | .335 | ||
| Good | .40 | .125 | .105 | .175 | ||
| Poor | .30 | .015 | .025 | â.055 | ||
| Bust | .10 | â.115 | â.255 | â.095 | ||
| Requirement 1: |
| Your portfolio is invested 30 percent each in A and C and 40 percent in B. What is the expected return of the portfolio? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) |
| Expected return of the portfolio | % |
| Requirement 2: |
| (a) | What is the variance of this portfolio? (Do not round intermediate calculations. Round your answer to 5 decimal places (e.g., 32.16161).) |
| Variance of the portfolio |
| (b) | What is the standard deviation of this portfolio? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) |
| Standard deviation | % |
| onsider the following information: |
| Rate of Return if State Occurs | ||||||||||||
| State of | Probability of | |||||||||||
| Economy | State of Economy | Stock A | Stock B | Stock C | ||||||||
| Boom | .15 | .39 | .49 | .29 | ||||||||
| Good | .55 | .15 | .20 | .08 | ||||||||
| Poor | .25 | â | .01 | â | .09 | â | .07 | |||||
| Bust | .05 | â | .20 | â | .24 | â | .10 | |||||
| a. | Your portfolio is invested 24 percent each in A and C, and 52 percent in B. What is the expected return of the portfolio? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
| Expected return | % |
| b-1. | What is the variance of this portfolio? (Do not round intermediate calculations and round your answer to 5 decimal places, e.g., 32.16161.) |
| Variance |
| b-2. | What is the standard deviation? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) |
| Standard deviation | % |
