Business, 28.06.2020 04:01 ntangpricha

State of Economy Probability of State of Economy Rate of Return if State Occurs: Stock A Rate of Return if State Occurs: Stock B Rate of Return if State Occurs: 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 3.2 percent?

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Answer from: demilasyone01

The expected risk premium on the portfolio if the expected T-bill rate is 3.2 percent is 8.71%

Explanation:

Stock A ReturnPROBABILITY Return × Investment

BOOM 27% 25% 6.75%

NORMAL 14.00% 65% 9.10%

BUST -19.00% 10% -1.90%

Total 13.95%

Stock B ReturnPROBABILITY Return × Investment

BOOM 15% 25% 3.75%

NORMAL 11.00% 65% 7.15%

BUST -4.00% 10% -0.40%

Total 10.50%

Stock C Return PROBABILITYReturn × Investment

BOOM 11% 25% 2.75%

NORMAL 9.00% 65% 5.85%

BUST 5.00% 10% 0.50%

Total 9.10%

PORTFOLIO ReturnPROBABILITY Return × Investment

STOCK A 14% 45% 6.28%

STOCK B 10.50% 45% 4.73%

STOCK C 9.10% 10% 0.91%

Total 11.91%

EXPECTED RISK PREMIUM =Market return - Risk free return

= 11.91% - 3.2%

= 8.71%

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Answer from: Quest

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