Portfolio expected return, standard deviation, risk premium
Consider the following information about three stocks:
State of Economy
Probability of State of Economy Rate of Return if State Occurs
Stock A Stock B Stock C
Boom .4 .20 .35 .60 .4 .20 .35 .60
Normal .4 .15 .12 .05 .4 .15 .12 .05
Bust .2 .01 -.25 -.50 .2 .01 -.25 -.50
a. If your portfolio is invested 40% each in A and B and 20% in C, what is the portfolio expected return? The variance? The standard deviation?
b. If the expected T-bill rate is 3.8%, what is the expected risk premium on the portfolio?
I need to see intermediate steps and formulas. Please do not respond in Excel. Thank you.
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