You are trying to develop a strategy for investing some birthday money in one in two different stocks. The anticipated annual return the investment in each stock under four different economic conditions has the probability distribution shown to the right.

		Returns
Probability	Economic Condition	Stock X		Stock Y
0.1	Recession	110		40
0.4	Slow growth	0		150
0.3	Moderate growth	90		30
0.2	Fast growth	160		100

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Part 1

a. Which is the correct decision tree for your strategy?

A.

RecessionGrowthStock XStock Y0.10.9-1104025020RecessionGrowth0.10.9

B.

RecessionSlow GrowthStock XStock YStock XStock Y0.10.4Moderate GrowthFast GrowthStock XStock YStock XStock Y0.30.2-11040015090-30160-100

C.

RecessionSlow GrowthStock XStock Y0.10.4Moderate GrowthFast Growth0.30.2-110*0.140*0.10*0.4150*0.490*0.3-30*0.3160*0.2-100*0.2RecessionSlow Growth0.10.4Moderate GrowthFast Growth0.30.2

D.

RecessionSlow GrowthStock XStock Y0.10.4Moderate GrowthFast Growth0.30.2-11040015090-30160-100RecessionSlow Growth0.10.4Moderate GrowthFast Growth0.30.2

b. Compute the expected monetary value (return) for stock X and for stock Y.

The expected return for stock X is $ (Type an integer or a decimal.)

The expected return for stock Y is $ (Type an integer or a decimal.)

c. Would you invest in stock X or stock Y? Explain.

It is better to invest in stock:

X

Y

because it has a:

lower expected return

higher expected return

lower standard deviation

higher standard deviation

.