About the variances and standard deviations of stock

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Reference no: EM131879330

Stock X shows a possible return distribution of 100%, 50%, 25%, 0%, and –50%, while stock Y has its corresponding distribution of 0%, 10%, 25%, 40%, and 50%, with probability of 1/5 each. You construct a portfolio with 60-40 weights between X and Y (i.e., 60% of your money is invested in Stock X and 40% in Y).

Which is the incorrect statement about the variances/standard deviations of Stock X and Stock Y?

A. To calculate the variances we have to calculate the expected returns first.

B. The variance of Stock X is computed as: Var (X) = (100-25)2(.2) + (50-25)2(.2) + (25-25)2(.2) + (0-25)2(.2) + (-50-25)2(.2).

C. Stock Y’s variance turns out to be $340 and standard deviation $18.44.

D. Since Stock X has a greater variance than Stock Y, we consider Stock X riskier than Y.

Reference no: EM131879330

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