The following stocks issued by companies X, Y and Z are available and an investor wants to set up a two-asset portfolio. Use the following information, explain which portfolio the investor should prefer. Assume that the investor will hold both assets in equal proportions.

Stock X

Today Rs40

Forecasted prices (after 1 month) Rs45

Rs42

Rs40

Rs38

Rs35

Probability 0.5

0.2

0.1

0.1

0.1

Stock Y

Today Rs50

Forecasted prices (after 1 month) Rs62

Rs58

Rs48

Rs45

Probability 0.3

0.2

0.4

0.1

Stock Z

Today Rs60

Forecasted prices (1 month) Rs70

Rs65

Rs60

Rs59

Probability 0.2

0.4

0.1

0.3

The relationship between the returns of the stocks are measured as follows:

Covariances:

COV_XY COV_XY

COV_YZ COV_XY

COV_XZ COV_XY