An Investor Is Analyzing the Risk Two Stocks a and B

question 62

Essay

An investor is analyzing the risk two stocks A and B within three expected states of the economy.If a boom economy occurs, stock A will provide an 8% return, while stock B will provide a 10% return; if an average economy transpires, stock A will provide a 5 return, while stock B will provide a 5% return; if a bust economy transpires, stock A will provide a -11% return and stock B will provide a -15% return.It is expected that there will be a 60% probability of an average return.Boom and Bust states have an equal chance of occurring.Determine which stock is riskier given the state information.

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Definitions:

Money Supply

The aggregate monetary assets within an economy at a certain instant, including cash, coins, and the money in checking and savings accounts.

Bank Capital

The resources a bank’s owners have put into the institution

Total Assets

The sum of all monetary values of everything a company owns, including cash, investments, property, and other resources, reflected on its balance sheet.

Reserve Requirements

The fraction of deposits that banks are required by law to keep on hand or with the central bank as a safeguard against bank runs.