Question

3. You are trying to develop a strategy for investing in two different stocks. The anticipated annual return for a $1,000 investment in each stock under four different economic conditions has the following probability distribution:

   Probability : 0.1 , 0.3, 0.3 , 0.3 .

   Economic Condition: Recession, slow growth, moderate growth, fast growth.

4. Return} -Stock X: -100 , 0 , 80 , 150 .

5. - Stock Y: 50 , 150 , -20 , -100 .

Compute the:

a. Expected return for stock X and for stock Y.

Answer 1

Economic Condition	Probability
Recession	0.1
Slow Growth	0.3
Moderate Growth	0.3
Fast Growth	0.3

Expected return for Stock X is as follows

Economic Condition	Probability	Return	Probability * Return
Recession	0.1	-100	-10
Slow Growth	0.3	0	0
Moderate Growth	0.3	80	24
Fast Growth	0.3	150	45
			Probability*Return = 59

So Expected Return for Stock X is Probability*Return = $59

Expected return for Stock X is as follows

Economic Condition	Probability	Return	Probability * Return
Recession	0.1	50	5
Slow Growth	0.3	150	45
Moderate Growth	0.3	-20	-6
Fast Growth	0.3	-100	-30
			Probability*Return = 14

So Expected Return for Stock Y is Probability*Return = $14