The distributions of rates of return for Companies AA and BB are given below:
State of theProbability of
EconomyThis 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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