Consider the following information on three stocks: A portfolio is invested 35 percent each in Stock A and Stock B and 30 percent in Stock C. What is the expected risk premium on the portfolio if the expected T-bill rate is 3.8 percent?
A) 11.47 percent
B) 12.38 percent
C) 16.67 percent
D) 24.29 percent
E) 29.99 percent

Question

Consider the following information on three stocks:  A portfolio is invested 35 percent each in Stock A and Stock B and 30 percent in Stock C. What is the expected risk premium on the portfolio if the expected T-bill rate is 3.8 percent?
A) 11.47 percent 
B) 12.38 percent 
C) 16.67 percent 
D) 24.29 percent 
E) 29.99 percent

Quizplus · Accepted Answer

E(R_p)_Boom = 0.35(0.55) + 0.35(0.35) + 0.30(0.65) = 0.51E(R_p)_Normal = 0.35(0.44) + 0.35(0.18) + 0.30(0.04) = 0.229E(R_p)_Bust = 0.35(0.37) + 0.35(-0.17) + 0.30(-0.64) = -0.122E(R_p) = 0.45(0.51) + 0.50(0.229) + 0.05(-0.122) = 0.3379RP_i = 0.3379 - 0.038 = 29.99 percent

Consider the Following Information on Three Stocks: a Portfolio