Consider the following five assets, which have rates of return in six equally likely possible scenarios:
(a) Assume you can only purchase one of these assets. What are their risks and rewards?
(b) Supplement your previous risk-reward rankings of assets P1-P5 with those of combination portfolios that consist of half P1 and half of each of the other 4 portfolios, P2-P5. What are the risks and rewards of these four portfolios?
(c) Assume that P1 is the market. Plot the rates of return for P1 on the x-axis and the return for each of the other stocks on their own y-axes. Then draw lines that you think best fit the points. Do not try to compute the beta-just use the force (and your eyes), Luke. If you had to buy just a little bit of one of these P2-P5 assets, and you wanted to lower your risk, which would be best?