State Prob. Stock x Stock y Stock z
Boom 0.3 25% 35% 30%
Good 0.2 15% 10% 20%
Poor 0.5 -24% 5% 10%
Suppose that the risk-free rate is 5% and your portfolio is invested 25% each in x and y, and 50% in z.
- Given the expected return on this market portfolio is 10%.Find each stock's b and your portfolio's b.
- Find each stock's Reward-to-Risk ratio.
- Which stock has highest risk premium? Find the diversification effect on this portfolio.