The rate of return of stocks of A and B under different states of economy are presented below along with the probability of the occurrence of each state of the economy.
|
|
Boom |
Normal |
Recession |
| Probability of Occurrence
Rate of Return on stock A (%) Rate of Return on stock B (%) |
0.3 20.0 50.0 |
0.4 30.0 30.0 |
0.3 50.0 20.0 |
(a) Calculate the expected rate of return and standard deviation of return for stocks A and for stocks B.
(b) If you could invest in either stocks A or stocks B, but not in both, which stock would you prefer and why?
(c) If the rate of return on stocks A was revised as shown below, would your preference in question (b) above change? Why?
|
Boom |
Normal |
Recession |
|
| Rate of Return on stock A (%) |
50.0 |
40.0 |
30.0 |
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