You are considering investing in two stocks. Your concern is

  • You are considering investing in two stocks. Your concern is that the economy may not do well. But you are fairly confident that the economy will grow at a normal rate with moderate inflation and interest rates given a range of economic outcomes over the next year.
  • Calculate the expected returns and standard deviation for each stock.

State of Economy

Probability of State of Economy

Rate of Return If State Occurs

Stock A

Stock B

Recession

.20

−.15

.20

Normal

.50

.20

.30

Boom

.30

.60

.40

Using the information above, suppose you have $20,000 total. If you put $15,000 in Stock A and the remainder in Stock B, and the economy exists in a normal state for one year, what will be the expected return and standard deviation of your portfolio?

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