You Are Comparing Share a to Share B A)Share A; Because It Has an Expected Return of 7

question 102

Multiple Choice

You are comparing share A to share B. Given the following information, which one of these two shares should you prefer and why?
$\begin{array} { | l | l | l | l | } \hline & & \multicolumn{2}{|l|} { \text { Rate of Return if State Occurs } } \\\hline \text { State of Economy } & \text { Probability of State of Economy } & \text { Share A } & \text { Share B } \\\hline \text { Boom } & 60 \% & 9 \% & 15 \% \\\hline \text { Recession } & 40 \% & 4 \% & 6 \% \\\hline\end{array}$

• A)Share A; because it has an expected return of 7% and appears to be more risky.
• B)Share A; because it has a higher expected return and appears to be less risky than share B.
• C)Share A; because it has a slightly lower expected return but appears to be significantly
• Less risky than share B.
• D)Share B; because it has a higher expected return and appears to be just slightly more risky
• Than share A.
• E)Share B; because it has a higher expected return and appears to be less risky than share A.

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Definitions:

Operating Profit

Earnings from a company's core business operations, excluding deductions of interest and taxes.

Trade Discount

A reduction in the retail price of goods, offered by wholesalers or manufacturers to retailers.

Discount

The reduction applied to the price of goods, services, or securities, or the amount by which the market value of a bond falls below its par value.

Golf Club Sets

A collection of golf clubs, typically including a variety of woods, irons, and a putter, used to play golf.