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.

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Definitions:

WACC

The Weighted Average Cost of Capital (WACC) represents the expected average return rate a company owes its security holders for financing its assets.

NPV

Net Present Value (NPV) is a financial metric used to evaluate the profitability of an investment, calculated by subtracting the present value of cash outflows from the present value of cash inflows over a period of time.

IRR

Utilized in assessing investment opportunities within capital budgeting, the Internal Rate of Return signifies the estimated profit rate of future investments.

Conflict Resolved

A situation wherein a disagreement, dispute, or discord has been successfully addressed, negotiated, and settled among parties involved.