Expedia Inc. is traded on NASDAQ and Red Lion Hotels is traded on NYSE. Sarah Forsyth owns shares in both companies. She wants to estimate what her expected return and risk for each stock will be for next year.
Expedia Red Lion Hotels
Possible Return Probability Possible Return Probability
20% 20% -15% 20%
30% 50% 20% 50%
40% 30% 60% 30%
a) Which stock is likely to give her a better return? Which stock is riskier? (show your calculations).
b) If she invests $15,000 in Red Lion Hotels and $5,000 in Expedia what will be the expected return for her portfolio and the portfolio risk? (show your calculations).