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Question: you are trying to develop a strategy for investing in...

Question details

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 parts​ (a) through​ (d).

Returns

Probability

Economic Condition

Stock X (in $’s)

Stock Y (in $’s)

0.4

Recession

- 55

-80

0.1

Slow growth

30

     50

0.2

Moderate growth

110

   130

0.3

Fast growth

160

   200

Note: Include Excel formulas.

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

(b)   Compute the standard deviation for stock X and for stock Y.

(c)    If the correlation between X and Y is 0.98,compute the mean and the standard deviation of a simple portfolio with 50% of the initial investment in Stock X and 50% of the initial investment in Stock Y.

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