Question
You are trying to develop a strategy for investing in two different stocks. The anticipated annual retum for a $1,000 investment in each stock
You are trying to develop a strategy for investing in two different stocks. The anticipated annual retum for a $1,000 investment in each stock under four different economic conditions has the probability distribution shown Probability Economic Condition to the right. Complete parts (a) through (g below. Returns Stock X Stock Y 0.1 0.2 0.4 0.3 Recession Slow growth Moderate growth Fast growth - 110 -180 20 60 90 140 160 190 a. Compute the expected return for stock X and for stock Y. The expected return for stock X is $77 (Type an integer or a decimal. Do not round.) The expected return for stock Y is $ 107. (Type an integer or a decimal. Do not round.) b. Compute the standard deviation for stock X and for stock Y. The standard deviation for stock X is $ . (Round to two decimal places as needed.) The standard deviation for stock Y is $ (Round to two decimal places as needed.) c. Would you invest in stock X or stock Y? Explain. Choose the correct answer below. O A. Based on the expected value, stock X should be chosen. However, stock X has a larger standard deviation, resulting in a higher risk, which should be taken into consideration. O B. Since the expected values are approximately the same, either stock can be invested in. However, stock X has a larger standard deviation, which results in a higher risk. Due to the higher risk of stock X, stock Y should be invested in. C. Based on the expected value, stock Y should be chosen. However, stock Y has a larger standard deviation, resulting in a higher risk, which should be taken into consideration. D. Since the expected values are approximately the same, either stock can be invested in. However, stock Y has a larger standard deviation, which results in a higher risk. Due to the higher risk of stock Y, stock X should be invested in. d. The covariance of stock X and Y is (Round to an integer as needed.) d. The covariance of stock X and Y is (Round to an integer as needed.) e. What does the covariance indicate about the relationship between stock X and Y? OA. As stock X increases in value, stock Y decreases in value. OB. As stock X decreases in value, stock Y increases in value. C. There is not enough information to determine an answer. D. As stock X increases in value, stock Y increases in value. f. Suppose 41% is invested in stock X and the rest in stock Y. Then the expected portfolio return is $ (Round to two decimal places as needed.) g. Suppose 72% is invested in stock X and the rest in stock Y. Then the expected portfolio return is $ (Round to two decimal places as needed.) with a portfolio risk of S with a portfolio risk of $
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To answer this question we will proceed in the following steps 1 Calculate the expected rate of return for Stock X 2 Calculate the standard deviation ...Get Instant Access to Expert-Tailored Solutions
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