Question 5 Not answered Marked out of 15.00 Flag question Consider the following information about three stocks: Rate

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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

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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%

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Question 5 Not answered Marked out of 15

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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%