Suppose investors have the following beliefs about the stock market next year:
State Probability Market Return
Boom 0.30 0.30
Normal 0.50 0.10
Recession 0.20 -0.10
The risk-free rate is 2%.
b. Your portfolio invests 60% of its value in the market and 40% in the risk-free asset. What is the expected return and return standard deviation of your portfolio?
c. Is your portfolio on the SML? If so, prove it. If not, show whether it is above or below the SML.
Please show all work