Chapter 5

1.You are trying to develop a strategy for investing in two different stocks. The anticipated annual return for a $1,000 investment in each stock under four different economic conditions has the following probability distribution:

Economic

Condition

Probability of Annual Return

(P)

Stock X Returns

(X)

P(X)

Stock Y Returns

(y)

P(Y)

Recession

0.1

-50

8,870

-100

16,510

Slow Growth

0.3

20

50

Moderate Growth

0.4

100

130

Fast Growth

0.2

150

200

= SxP(x)=

= SxP(y)=

a.What is the expected return value for Stock X? __71_

b.What is the expected return value for Stock Y? _97__

Stock X Returns

(x)

(x - )

Subtract the expected value ofStock X

(x - )

Square the value from the left column

P(x)

(x - )P(x)

-50

0.1

20

0.3

100

0.4

150

0.2

=

=

c.Compute the variance of Stock X. __3829__

d.Compute the standard deviation of Stock X. __61.8___

Stock Y Returns

(y)

(y - )

Subtract the expected value ofStock Y

(y - )

Square the value from the left column

P(y)

(y - )P(y)

-100

0.1

50

0.3

130

0.4

200

0.2

=

=

e.Compute the variance of Stock Y. _7101____

f.Compute the standard deviation of Stock Y. __84.3___

g.Compare the expected value and standard deviation of both stocks. Would you invest in Stock X or Stock Y? Explain with statistical support.