You are trying to develop a strategy for investing in two different stocks. The

Question

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 probability distribution shown to the right. Complete part (a)

Probability       Economic_condition      Stock X           Stock Y

0.1                          Recession                   -120                    -70

0.3                          Slow_growth                  60                      30

0.4                       Moderate_growth            130                    80

0.2                          Fast_growth                    210                  170

Compute the expected return for stock X and for stock Y.

Explanation / Answer

from above

therefore expected return for stock X =E(X)=100

and expected return for stock Y =E(y)= 68

Probability P Economic_condition Stock X Stock Y P*X P*Y 0.1 Recession -120 -70 -12 -7 0.3 Slow_growth 60 30 18 9 0.4 Moderate_growth 130 80 52 32 0.2 Fast_growth 210 170 42 34 total 100 68

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