The rate of return on Stocks X and Y under different states of the economy are given below:
|
Boom |
Normal |
Recession |
|
| Probability of occurrence
Rate of Return on stock X (%) Rate of Return on stock Y (%) |
0.35 20 40 |
0.50 30 30 |
0.15 40 20 |
(i) Calculate the expected return and standard deviation of return on both the stocks.
(ii) If you could invest in either stocks X or stock Y, but not in both, which stock would you prefer?
(iii) What would be your decision if the probability changes to 0.30: 0.40: 0.30?
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