Consider the following information on three stocks: state of economy probability of state of economy rate of return if state occurs stock a stock b stock c boom .25 .27 .15 .11 normal .65 .14 .11 .09 bust .10 −.19 −.04 .05 a portfolio is invested 45 percent each in stock a and stock b and 10 percent in stock c. what is the expected risk premium on the portfolio if the expected t-bill rate is 4.1 percent?

market premium = 0,0781 = 7.81%

Explanation:

We have to calculate the market return and then calcualte the premium as the difference between the expected return on the market and the risk-free rate:

We multiply each outcome by the stock weight. and then for the probability of occurence of that state of economy

Calculations for boom:

Change of boom x (weighted outcome A + weighted outcome B + weighted outcome C)

0.25    x    (0.45 x 0.15 + 0.45 0.27 + 0.1 x 0.05) = 0.05

market expected return 0,1191

Market premium: 0,1191 - 0,041 = 0,0781

y=mx+b is the right slope of velocity carry the 4 over