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 3.3 percent?
A)11.47 percent
B)12.38 percent
C)16.67 percent
D)24.29 percent
E) 25.82 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 3.3 percent?
A)11.47 percent 
B)12.38 percent 
C)16.67 percent 
D)24.29 percent 
E) 25.82 percent

Quizplus · Accepted Answer

E(R_p)_Boom = 0.35(0.42) + 0.35(0.35) + 0.30(0.65) = 0.4645E(R_p)_Normal = 0.35(0.31) + 0.35(0.18) + 0.30(0.04) = 0.1835E(R_p)_Bust = 0.35(0.17) + 0.35(-0.17) + 0.30(-0.64) = -0.192E(R_p) = 0.45(0.51) + 0.50(0.229) + 0.05(-0.122) = 0.2912RP_i = 0.2912 - 0.033 = 29.99 percent

Consider the Following Information on Three Stocks: a Portfolio