Consider two available stocks: A and B. Suppose that the rates of return on both stocks

6. Consider two available stocks: A and B. Suppose that the rates of return on both stocks, RA and RB, are random variables with the following probability distribution functions: 

• _P(RA = x) = 1/4; for x = -1, 0, 1, 2 
• _P(RB = x) = (x + 5)/36; for x = -4, -3, -2, -1, 0, 1, 2, 3 

a. Calculate the expected value of both rates of return. 
b. Calculate the standard deviation of both rates of return. Hint: By definition, var(X) = E(X2) – (E(X))2 = E[(X – E(X))2]. 
c. Which stock has a higher stand-alone risk? Explain. 
d. Which stock (if either) is a better investment? Explain.