You are comparing stock A to stock B. Given the following information, which one
ID: 2632427 • Letter: Y
Question
You are comparing stock A to stock B. Given the following information, which one of these two Stocks should you prefer and why? Rate of Return if State Occurs State of the Economy Probability of State of the Economy Stock A Stock B Boom 60% 9% 15% Recession 40% 4% -6% a. Stock A; because it has a higher expected return and appears to be less risky than stock B. b. Stock A; because it has a lower expected return but appears to be less risky than stock B. c. Stock B; because it has a higher expected return and appears to be more risky than stock A. d. Stock B; because it has a higher expected return and appears to be less risky than stock A.
Explanation / Answer
You are comparing stock A to stock B. Given the following information, which one of these two stocks should you prefer and why? Rate of Return if
State of Probability of State Occurs
Economy State of Economy Stock A Stock B
Boom 60% 9% 15%
Recession 40% 4% -6%
Stock A; because it has a higher expected return and appears to be less risky than stock B.
62. E(r)A = (.60
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