# 5.12 you are trying to develop a strategy for … investing in two

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

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

Compute the

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.

Question 5.13

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:

a.30%

b.50%

c.70%

d. On the basis of the results of (a) through (c), which portfolio

would you recommend? Explain