You are comparing stock A with stock B. Stock A will return 9 percent in a boom
Question:
You are comparing stock A with stock B. Stock A will return 9 percent in a boom and 4 percent in a slump. Stock B will yield 15 percent in a boom and lose 6 percent in a slump. The probability of a boom is 60 percent with a 40 percent probability of a recession. Given this information, which of these two actions should you prefer and why?
Action A; because it has a higher expected return and appears to be riskier than Stock B
Stock A; because it has a higher expected return and appears to be less risky than Stock B
Stock A; because it has a slightly lower expected return but appears to be significantly less risky than stock B
action B; because it has a higher expected return and appears to be slightly riskier than stock A
stock B; because it has a higher expected return and appears to be less risky than stock A
Stock A has an expected return of 17.8 percent and stock B has an expected return of 9.6 percent. However, the risk of stock A as measured by its variance is 3 times that of stock B. If the two stocks are combined equally in a portfolio, what would be the expected return on the portfolio?
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill