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Homework answers / question archive / Question 5 Not answered Marked out of 15
Question 5 Not answered Marked out of 15.00 Flag question Consider the following information about three stocks: Rate of Return If State Occurs State of Probability of Economy State of Economy Stock A Stock B Stock C Boom 20 .28 .40 .56 Normal .45 .22 20 .18 Bust .35 .00 - 20 -.48 If your portfolio is invested 30 percent each in A and B, and if the expected T-bill rate is 4.20 percent, what is the expected risk premium on the portfolio? Hint: First find how much you should invest in Stock C. Then, try to find risk premium of the portfolio Please provide your answer in percentage (%), and in two decimals! Answer: Question 6 Complete Marked out of 2.50 P Flag question average return The average compound return earned per year over a multiyear period is called the
| w1 | Weight of Stock A | 0.3 | ||||||||||
| w2 | Weight of Stock B | 0.3 | ||||||||||
| w3 | Weight of Stock C=1-0.3-0.3 | 0.4 | ||||||||||
| w1+w2+w3=1 | ||||||||||||
| STOCK A | STOCK B | STOCK C | PORTFOLIO | |||||||||
| P | w1 | R1 | w2 | R2 | w3 | R3 | Rp=w1R1+w2R2+w3R3 | X=P*Rp | ||||
| State of Economy | Probability | Weight | Return | Weight | Return | Weight | Return | Portfolio Return | Probability* Portfolio Return | |||
| Boom | 0.2 | 0.3 | 0.28 | 0.3 | 0.4 | 0.4 | 0.56 | 0.428 | 0.0856 | |||
| Normal | 0.45 | 0.3 | 0.22 | 0.3 | 0.2 | 0.4 | 0.18 | 0.198 | 0.0891 | |||
| Bust | 0.35 | 0.3 | 0 | 0.3 | -0.2 | 0.4 | -0.48 | -0.252 | -0.0882 | |||
| SUM | 0.0865 | |||||||||||
| EXPECTED PORTFOLIO RETURN | 0.0865 | |||||||||||
| EXPECTED PORTFOLIO RETURN | 8.65% | |||||||||||
| Risk Free Return | 4.20% | |||||||||||
| EXPECTED RISK PREMIUM ON THE PORTFOLIO | 4.45% | (8.65-4.2) | ||||||||||
| ANSWER:4.45% | ||||||||||||
