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Question

$1.00 PORTFOLIO RETURN - 2 QUESTIONS

From Business: Finance
Closed, but you can still post tutorials
Due on May. 31, 2012
Asked on May. 30, 2012 at 02:13:34AM

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educaresolutions
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Questions Asked: 2
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1. Consider the following information:

		Rate of Return if State Occurs
State of	Probability of State
Economy	of Economy	Stock A	Stock B	Stock C
Boom	0.74	0.12	0.06	0.32
Bust	0.26	0.21	0.27	–0.12

Required:

What is the variance of a portfolio invested 29 percent each in A and B and 42 percent in C? (Round your answer to 5 decimal places (e.g., 32.16161).)

2. Suppose you observe the following situation:

State of Economy	Probability of State	Return if State Occurs
Stock A	Stock B
Bust	0.17	−0.05	−0.06
Normal	0.72	0.18	0.17
Boom	0.11	0.46	0.31

Required:

Assuming the capital asset pricing model holds and stock A’s beta is greater than stock B’s beta by .31, what is the expected market risk premium? (Do not include the percent sign (%). Round your answer to 2 decimal places (e.g., 32.16).)

Market risk premium