The Distributions of Rates of Return for Companies AA and BB

question 119

True/False

The distributions of rates of return for Companies AA and BB are given below:
State of the Probability of
Economy This State Occurring AA BB
Boom 0.2 30% -10%
Normal 0.6 10% 5%
Recession 0.2 -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.

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Definitions:

Dishonored Check

A check that a bank has refused to cash or pay because there are insufficient funds in the account on which it was drawn, or because it is considered a fraudulent check.

Contractual Obligation

is a legal duty that arises out of a contract, requiring a party to fulfill the terms of the agreement.

Drawer

Drawer is the party in a bill of exchange, such as a check, who is making the payment, directing the drawee (usually a bank) to pay a specified sum to the payee.

Indorser

A person who signs a negotiable instrument, such as a check or promissory note, on the back, indicating their consent to transfer the document’s ownership or to guarantee its payment.