Stocks: Expected Return and Standard Deviation

You are trying to develop a strategy for investing in two different stocks. The anticipated annual return for $1000 investment in each stock under four different economic conditions has the following probabilitydistribution:

Returns
Probability Economic Condition Stock X (in $’s) Stock Y (in $’s)
0.1 Recession – 50 – 100
0.3 Slow growth 20 50
0.4 Moderate growth 100 130
0.2 Fast growth 150 200

Note: Return means the net change in your initial investment ($1000) after a year, for example, Return=-100 (negative return), it means that after one year, your wealth become $900.

(a) Compute the expected return for stock X and for stock Y.
(b) Compute the standard deviationfor stock X and for stock Y.

Problem: You are trying to develop a strategy for investing in two different stocks. The anticipated annual return for $1000 investment in each stock for four different economic conditions has the following probability …

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