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:

Blacksmiths

Artisans who work with metal, particularly iron, using tools to forge and shape it into products such as tools, weapons, and structures.

AFL

The American Federation of Labor, a national federation of labor unions in the United States, founded in 1886 and focused on skilled workers.

Knights of Labor

A significant labor organization in the United States during the 19th century that sought to organize workers across different industries to improve working conditions.

Unions

Organizations formed by workers to protect their rights, negotiate collective contracts, and provide support to members on employment matters.