You are trying to develop a strategy for investing in two different stocks. The
ID: 2925819 • Letter: Y
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 six different economic conditions has the probability distribution shown to the right. Complete parts (a) through (c) below.
a) Compute the expected return for stock X and stock Y?
b) Compute the standard deviation for stock X and stock Y?
c) Compute the covariance for stock X and stock Y?
Returns
Probability
Economic Condition
Stock X
Stock Y
0.02
Extreme recession
100
979
0.08
Recession
60
300
0.15
Stagnation
40
130
0.35
Slow growth
80
130
0.30
Moderate growth
130
140
0.10
High growth
150
350
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 six different economic conditions has the probability distribution shown to the right. Complete parts (a) through (c) below.
a) Compute the expected return for stock X and stock Y?
b) Compute the standard deviation for stock X and stock Y?
c) Compute the covariance for stock X and stock Y?
Returns
Probability
Economic Condition
Stock X
Stock Y
0.02
Extreme recession
100
979
0.08
Recession
60
300
0.15
Stagnation
40
130
0.35
Slow growth
80
130
0.30
Moderate growth
130
140
0.10
High growth
150
350
Explanation / Answer
a)
Expected return of stock X=81.2
Expected return of stock Y=59.42
b)
Standard deviation of stock X=60.78
Standard deviation of stock Y=222.3
c)
Covariance=12143.096
Economic Condition Probability Stock X EX Variance X Stock Y EY Variance Y Covariance Extreme recession 0.02 -100 -2 656.6688 -979 -19.58 21566.32193 3763.23408 Recession 0.08 -60 -4.8 1594.9952 -300 -24 10334.61891 4060.00832 Stagnation 0.15 40 6 254.616 -130 -19.5 5381.99046 1170.6156 Slow growth 0.35 80 28 0.504 130 45.5 1743.53774 -29.6436 Moderate growth 0.3 130 39 714.432 140 42 1947.94092 1179.6912 High growth 0.1 150 15 473.344 350 35 8443.67364 1999.1904 81.2 3694.56 59.42 49418.0836 12143.096 SD 60.78289233 SD 222.301785Related Questions
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