Question: An investor wishes to buy a stock to be held for one year in anticipation of capital gain. She has narrowed her choice down to High-Volatility Engineering and Stability Power. Both stocks currently sell for $100 per share and yield $5 dividends. The probability distribution for next year’s price has been judgmentally assessed for each stock. These are given below, where

P₁: Price per share of High-Volatility stock

P₂: Price per share of Stability stock.

a. Determine the expected value or average price for a share of High Volatility stock.

b. Determine the variance and standard deviation for a share of High Volatility stock.

(Parts (a) and (b) should be done together on this sheet)

c. Determine the expected value or average price for a share of Stability Power stock.

d. Determine the variance and standard deviation for a share of Stability Power stock.

(Parts (c) and (d) should be done together on this sheet)

e. Plot price against probability of occurrence for each stock using a “spike” diagram similar to that on page 196 of the text. Let the units on the vertical axis be in increments of .05.

f. Given your answers to (a) through (e), should the investor select the stock with the highest average value? Why or why not? (I am looking for your perspective!)

g. Why do you think the names “High Volatility” and “Stability Power” were chosen for these two stocks?