Given the following two stocks, Alpha Inc. and Bravo Inc., with their expected p
ID: 2635155 • Letter: G
Question
Given the following two stocks, Alpha Inc. and Bravo Inc., with their expected performances as estimated below, which stock is financially preferable based on expected return and risk?
Alpha Incorporated
Bravo Incorporated
Probability
Return
Probability
Return
0.30
.011
0.30
(0.05)
0.40
.015
0.30
0.06
0.30
.019
0.30
0.14
0.20
0.22
100%
100%
Alpha Incorporated
Bravo Incorporated
Probability
Return
Probability
Return
0.30
.011
0.30
(0.05)
0.40
.015
0.30
0.06
0.30
.019
0.30
0.14
0.20
0.22
100%
100%
Explanation / Answer
Alpha Incorporated Bravo Incorporated E(A) E(B) Var A Var B Probability Return Probability Return [A-E(A)]^2*P [B-E(B)]^2*P 0.3 0.011 0.3 -0.05 0.0033 -0.015 0.0000048 0.005796 0.4 0.015 0.3 0.06 0.006 0.018 0 0.000252 0.3 0.019 0.3 0.14 0.0057 0.042 0.0000048 0.00078 0.2 0.22 0.015 0.044 0.0000096 0.003432 100% 100% 0.089 0.010261 SD(A) 0.003098 SD(B) 0.101297 Alpha should be selected as its less riskier than Bravo
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