You observe the following information about two stocks:

Suppose you are considering an investment in either one of these two individual stocks or a portfolio consisting of 20% of Stock X and 80% of Stock Y.

a. Calculate the expected return of each stock and of the portfolio.

b. Calculate the standard deviation of return of each stock and of the portfolio.

c. When you compare the risk of Stock X, Stock Y, and the portfolio, what would you find? Discuss.

State Good Normal Poor Probaility 0.39 0.28 0.33 Return on stock X 23% 11% -15% Return on Stock Y -8% 6% 17%