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State Prob. Stock x Stock y Stock z Boom 0.3 25% 35% 30% Good 0.2 15% 10% 20% Poor 0.

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.

  1. Given the expected return on this market portfolio is 10%.Find each stock's b and your portfolio's b.
  2. Find each stock's Reward-to-Risk ratio.
  3. Which stock has highest risk premium? Find the diversification effect on this portfolio.


Thank you!

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