Calculate the expected real rate of return

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Reference no: EM132773528

Given the following probability distributions for returns on stocks A, B, and C:

State, Probability, Return on stock A, return on stock B, return on stock C

1 0.15 20% 20% 5%

2 0.35 15% 10% 10%

3 0.35 10% 15% 15%

4 0.15 5% 5% 20%

You invest $5,000 of your own money in a portfolio composing of these three stocks.

Problem (a) You take a long position of $4,000 in A, a long position of $3,000 in B, and a ______ position of $ in C. Calculate the expected rate of return and standard deviation of your 3-stock portfolio.

Problem (b) Assume that the inflation rate and risk free rate are, respectively, 2% and 2.5%, calculate the expected real rate of return, and the REAL risk premium, of your 3-stock portfolio constructed in part (a)

Reference no: EM132773528

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