As an MBA graduate who has studied strategic financial management, you are approached by a relative who has recently come into a large inheritance and is looking to buy shares. Your relative is interested in two shares and provides you with the below information:

Share A:

 

In a boom period that has a 0.55 chance of happening the observed  return on this share will be 25% and in a recession which has a 0.45  chance of happening the share exhibits an observed return of 7%.

 

Share B:

 

In a boom period that has a 0.55 chance of happening the observed  return on this share will be 10% and in a recession which has a 0.45  chance of happening the share exhibits an observed return of 17%.

 

 

QUESTION:

Identify which investment choice would be best for your relative, who is risk averse, by calculating the expected returns and standard deviation for both shares.

Answer rating: 100% (QA)

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