The Distributions of Rates of Return for Companies AA and BB

question 127

True/False

The distributions of rates of return for Companies AA and BB are given below: $\begin{array}{c}\begin{array}{l}\text { State of the}\\\underline{\text { Economy}}\\\text { Boom}\\\text { Normal}\\\text { Recession}\end{array}\begin{array}{c}\text { Probability of }\\\underline{\text {This State Occurring}}\\0.2 \\0.6 \\ 0.2 \end{array}\begin{array}{l}\\\underline{\text {A A}}\\3 0 \% \\10 \% \\-5 \% \end{array}\begin{array}{l}\\\underline{\text {BB}}\\-10 \% \\5 \% \\50 \% \end{array}\end{array}$
We can conclude from the above information that any rational,risk-averse investor would be better off adding Security AA to a well-diversified portfolio over Security BB.

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