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Ron Travolta is considering two stocks for investment Pulp and Fiction. He has estimated...

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Accounting

  1. Ron Travolta is considering two stocks for investment Pulp and Fiction. He has estimated their return for three possible states of the economy boom, normal and recession. Ron is fairly optimistic. He believes there is a 40% chance that the economy will boom, a 35% chance that the economy will be normal and a 25% chance that the economy will go into recession. Ron wants to determine which stock he should invest in.

Return if State Occurs

State of Economy

Probability of State of Economy

Pulp

Fiction

Boom

0.40

35.50%

22.40%

Normal

0.35

10.30%

8.50%

Recession

0.25

-12.70%

-4.20%

  1. Calculate expected return for each of the stocks.

  1. Calculate standard deviation for each of the stocks.

  1. Which stock has a higher return? Which has a higher risk? Would you expect this relationship between risk and return? Explain why (2-3 sentences).

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