Task:
Two Stocks, X and Y, have three states of nature based on the state of the economy:
State of Economy Probability Stock X Return Stock Y Return
Recession 0.10 -0.20 0.30
Normal 0.60 0.10 0.20
Boom 0.30 0.70 0.50
1. What are the expected returns and standard deviations for these two stocks?
2. Suppose you have $20,000 total. If you put $6,000 in X and the remainder in Y, what will be the expected return and standard deviation on your portfolio be?