5.12 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: RETURNS PROBABILI
5.12 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
Probability Economic Condition Stock X Stock Y
0.1 Recession -100 50
0.3 Slow growth 0 150
0.3 Moderate growth 80 -20
0.3 Fast growth 150 100
a. expected return for stock X and for stock Y.
b. standard deviation for stock X and for stock Y.
c. covariance of stock X and stock Y.
d. Would you invest in stock X or stock Y? Explain.
Suppose that in Problem 5.12 you wanted to create a
portfolio that consists of stock X and stock Y. Compute the
portfolio expected return and portfolio risk for each of the
following percentages invested in stock X:
d. On the basis of the results of (a) through (c), which portfolio
would you recommend? Explain