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    Portfolio expected return, standard deviation, risk premium

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    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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    Solution Summary

    The solution calculates the expected return, variance, standard deviation and the risk premium of a portfolio.