The Distributions of Rates of Return for Companies AA and BB

question 2

True/False

The distributions of rates of return for Companies AA and BB are given below: $\begin{array}{llrr}\text { State of the } & \text { Probability of } \\\text { Economy } & \text { This State Occurring }&AA&BB\\\text { Boom } & 0.2 & 30 \% & -10 \% \\\text { Normal } & 0.6 & 10 \% & 5 \% \\\text { Recession } & 0.2 & -5 \% & 50 \%\end{array}$ 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.

---

Definitions:

Rate

A measure, quantity, or frequency, typically one measured against another quantity or measure, such as speed (distance per unit of time) or interest rate (interest per unit of time or per amount of principle).

Successes Occur

Instances in which an outcome meets the defined criteria for success in an experiment or set of observations.

Poisson Random Variable

A statistical measure that represents the probability of a given number of events occurring in a fixed interval of time or space.

Poisson Experiment

A Poisson experiment is a statistical experiment that classifies the experiment into a fixed number of trials, where each trial represents a specific time interval or region of space, and counts the number of times a particular event occurs.