The table below describes the stock returns of Cars Unlimited plc and Oil Producer plc under different economic conditions. Cars Unlimited is a car manufacturer and Oil Producer a petroleum exploration and production company.

	Probability	Cars Unlimited return	Oil Producer’s return
Bull Market	40%	15%	10%
Bear Market	50%	2%	-3%
Oil Crisis	10%	-10%	45%

Consider the portfolios of three investors. Investor X has 100% of his portfolio invested in Cars Unlimited plc. Investor Y has half of her portfolio in Cars Unlimited plc and the other half in UK government bonds. Government bonds have a yield to maturity of 3% and make annual coupon payments of £2 (per £100 nominal value). Investor Z has a portfolio that is invested 50% in Cars Unlimited plc and 50% in Oil Producer plc.

REQUIRED

a) Prepare a table comparing the expected return and risk (expressed as the standard deviation of returns from the expected value) of the portfolios of Investors X, Y, and Z. Detailed calculations

b) Explain the principle of diversification using your answer to (a) above.

c) Explain what an efficient portfolio is. Identify one of the investors’ portfolios in (a) that cannot be described as efficient.

d) Which of the portfolios in (a) is the best portfolio for investors which investors will choose over the others? Explain your answer.