An Analyst Predicts Three Economic States of a Boom, Average

question 46

Essay

An analyst predicts three economic states of a Boom, Average and Bust economic states, with probabilities of 40%, 50% and 10% respectively.If a boom economic state occurs, stock A will provide a 10% return and stock B will provide a 2% return; if an average economy occurs, stock A will provide a 6% return and stock B will provide a 5% return.During a bust economy, stock A will provide a -5% return and stock B a 12% return.Given this information, determine which stock is riskier.

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Definitions:

Natural Resources

Raw materials that are sourced from the environment and utilized for economic gain, such as minerals, forests, and water.

Cost Allocation

The process of identifying, aggregating, and assigning costs to cost objects, such as departments or products.

Acquisition

The process of acquiring control of another company or business asset through purchase, merger, or another method.

Independent Appraiser

A certified professional who provides an unbiased opinion on the value of an asset, often used in real estate transactions, without any direct connection to the buyer or seller.