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Ch5- Questions & Answers - Q1 You are trying to...

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Q1. You are trying to develop a strategy for investing in t different stocks. The anticipated annual return for a $1,000 investment in each stock under four different economic conditions has the following probability distribution: Probabilities & Outcomes: P X Y recession 0.1 -100 50 slow growth 0.3 0 150 moderate growth 0.3 80 -20 fast growth 0.3 150 -100 a. Compute the expected return for X and Y. b. Compute the standard deviation for X and Y. c. Compute the covariance of X and Y. d. Would you invest in X or Y? Explain. (a) E ( X ) = ( 29 1 N i i i X P X = = 59 E ( Y ) = ( 29 1 N i i i Y P Y = = 14 (b) X σ = ( 29 ( 29 2 1 N i i i X E X P X = - = 78.6702 Y σ = ( 29 ( 29 2 1 N i i i Y E Y P Y = - = 99.62 (c) σ XY = ( 29 ( 29 ( 29 1 N i i i i i X E X Y E Y P X Y =   - -   = 6306 (d) Stock X gives the investor a lower standard deviation while yielding a higher expected return so the investor should select stock X . Q2. Half the portfolio assets are invested in X and half in Y. E(X)=$105, E(Y)=$35 , 14,725, 11,025 X Y σ σ = = , σ XY = 12,675 - .Calculate the portfolio expected return and risk if a. 30% of the portfolio assets are invested in X and 70% in Y.
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