Reference no: EM13987743
Suppose there are three securities (A, B, and C) to choose from to create your portfolio. Next year the economy will be in an expansion, normal, or recession state with probabilities 0.40, 0.33, and 0.27, respectively. The returns (%) on the securities in these states are as follows: Security A {expansion = +8, normal = +7, recession = +2}; Security B {-1, -1, +5}; Security C {+14, +7, -8}. You are considering 4 potential portfolios of these 3 securities, with the following specific weights on each: Portfolio I (0.24, 0.38, 0.38); Portfolio II (0.32, 0.34, 0.34); Portfolio III (0.48, 0.26, 0.26); Portfolio IV (0.72, 0.14, 0.14); where the numbers inside parentheses are weight of A, weight of B and weight of C, respectively. Which portfolio has the lowest risk?
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