Consider the Following Probability Distribution for Stocks a and B

question 12

Multiple Choice

Consider the following probability distribution for stocks A and B: $$\begin{array} { c c c c } \text { State } & \text { Probability } & \text { Return on Stock A} & \text { Return on Stock B } \\1 & 0.10 & 10 \% & 8 \% \\2 & 0.20 & 13 \% & 7 \% \\3 & 0.20 & 12 \% & 6 \% \\4 & 0.30 & 14 \% & 9 \% \\5 & 0.20 & 15 \% & 8 \% \\\hline\end{array}$$ The expected rates of return of stocks A and B are _____ and _____, respectively.

• A) 13.2%; 9%
• B) 14%; 10%
• C) 13.2%; 7.7%
• D) 7.7%; 13.2%

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Definitions:

Pre-tax Book Income

The income of a company calculated before any tax is applied, based on accounting principles rather than tax laws.

Deferred Tax Liability

A tax obligation that is recorded on the balance sheet due to temporary timing differences in recognizing revenue and expenses for accounting and tax purposes.

Capital Expenditures

Capital allocated by an enterprise for the purchase, improvement, and upkeep of tangible assets like land, factories, or machinery.

GAAP Warranty Expenses

Expenses recognized in accordance with Generally Accepted Accounting Principles (GAAP) related to the estimated cost of warranties on sold products.