題組內容

一、 There are two stocks in the market: stock G and stock B. The price of stock G today is $52. The price of stock G next year will be $40 if the economy is in a recession, $59 if the economy is normal, and $68 if the economy is expanding. The probabilities of recession, normal times, and expansion are 0.1, 0.65, and 0.25, respectively. Stock G pays no dividends and has a correlation of 0.45 with the market portfolio. Stock B has a standard deviation of 0.51, a correlation with the market portfolio of 0.40, and a correlation with stock G of 0.50. The market portfolio has a standard deviation of 0.20. The risk-free rate is 4 percent and the market risk premium is 7.5 percent. Assume the CAPM holds.


1. If you are a typical, risk-averse investor with a well-diversified portfolio, which stock would you prefer? Why? (10分)