A close family friend has approached you to help her determine which of the two common stocks she should invest in. 

 

Common Stock A			Common Stock B
Probability	Return		Probability	Return
0.33	11%		0.25	-5%
0.33	15%		0.25	6%
0.33	19%		0.25	14%
			0.15	22%

 

Required: 

a) Calculate the expected returns of stock A 

b) Determine the risk (standard deviation) and return of stock A 

c) Calculate the expected returns of stock B 

d) Determine the risk (standard deviation) and return of stock B 

e) Which investment should your friend invest in? 

f) Jenny has decided that she will invest her $100,000 savings in stocks as follows: 

 

Company	Percentage of investment	Expected rate of return
Standards Company Limited	45%	9%
Starbucks	15%	12%
Treasury Bill	40%	4%

 

Required: 

What rate of return should Jenny expects to receive on her portfolio? 

 

a) Calculate the expected returns of stock A 

b) Determine the risk (standard deviation) and return of stock A

c) Calculate the expected returns of stock B 

d) Determine the risk (standard deviation) and return of stock B 

e) Which investment should your friend invest in? 

f) Jenny has decided that she will invest her $100,000 savings in stocks.