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Selecting the better investment option

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.

Solution Preview

Expected return in case of stock A=0.60*9%+0.40*4%=7%
Standard deviation of stock ...

Solution Summary

The solution selects the better investment option.

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