2. How can we assess the risk of an individual stock?

a. Kraska will first address this question by looking at recent returns on Amazon.com and on Coca-Cola. Compute the mean and standard deviation for each and explain their meaning.

Year Amazon.com Coca-Cola

2007 134.77% 33.35%

2006 -16.31% 26.35%

2005 6.46% 2.24%

2004 -15.83% 13.93%

2003 178.56% 21.94%

b. Kraska will also suggest that it is good to assess risk by looking forward to how we expect stocks to react to a particular set of circumstances or "states of nature". Use the following set of assumpitions for the coming year to compute the expected rate of return and the standard deviation for Amazon.com, Coca-Cola, and a portfolio with equal dollar amounts invested in Amazon.com and Coca-Cola.

State of economy Probability of state Amazon.com conditional return Coca-Cola COnditional Return 50/50 Portfolio Conditional return

Recession 30% -25% 5% -10%

Average 50% 30% 12% 21%

Boom 20% 50% 20% 32.50%