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.

---

Definitions:

Ending Inventory

The total value of all inventory still available for sale at the end of an accounting period, calculated by adding new purchases to beginning inventory and subtracting the cost of goods sold.

Ethical Budgeting

The practice of creating budgets that reflect moral principles and considerations, ensuring resources are allocated in a fair and responsible manner.

Fudge Factor

An additional amount or adjustment made to an estimate to account for potential error or uncertainty.

Slack

A workplace communication tool, or in a different context, the amount of time a project can be delayed without causing a delay to subsequent projects.