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Probability: Which Portfolio Would You Recommend?

You are trying to develop a strategy for investing in two different stocks. The anticipated annual return for a $1000 investment in each stock has, in your opinion, the following probability distribution:

Returns:

Probability Stock A Stock B
0.1 -$100 $50
0.3 $0 $150
0.3 $80 -$20
0.3 $150 -$100

Suppose you want to create a portfolio that consists of stock A and stock B. Compute the portfolio expected return and portfolio risk for each of the following percentages invested in stock A:

a) 30%
b) 70%

On the basis of the results of the above answers, which portfolio would you recommend? Explain.

Solution Preview

See the attached file.

You are trying to develop a strategy for investing in two different stocks. The anticipated annual return for a $1000 investment in each stock has, in your opinion, the following probability distribution: Return
Probability Stock A Stock B
0.1 ...

Solution Summary

This solution provides an explanation for the portfolio recommendation.

$2.19