The distributions of rates of return for Companies AA and BB are given below: ? State of the Economy Probability of This State Occurring ? AA ? BB Boom0.2 30% -10% Normal0.6 10% 5% Recession0.2 -5% 50% ? We can conclude from the above information that any rational, risk-averse investor would be better off adding Security AA to a well-diversified portfolio over Security BB.
Answer the following statement true (T) or false (F)
False
Rationale: The stocks have the same expected returns, but BB does badly in booms and well in recessions. Therefore, it would do more to reduce risk.
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