d. Compute the covariance of the stocks. What does this tell you about the relationship between these stocks?

5. Suppose you decide to invest in the two funds equally. Calculate the expected value and standard deviation for the new random variable, X + Y, the sum of the two investments.

6. How does the expected value and standard deviation compare to the values you calculated for the individual stocks? How would this influence your investment strategy?

Remember Your Investment Objective: Maximize expected return (mean) while minimizing risk (standard deviation). 1. You are trying to develop a strategy for investing in two different stocks. The anticipated annual return for a $1,00 investment in each stock under four economic conditions has the following probability distribution. (Also recorde in the Excel sheet WS-Stocks). Probability Economic condition Stock X Stock Y 0.1 Recession -50 -100 0.3 Slow growth 20 50 0.4 Moderate growth 100 130 0.2 Fast growth 150 200