Question: You are evaluating two securities under two possible economic scenarios, boom (expansion) and bust (recession). You are unsure of which scenario will occur, so you

  1. You are evaluating two securities under two possible economic scenarios, boom (expansion) and bust (recession). You are unsure of which scenario will occur, so you assign a 50% probability that either scenario will occur. You also expect the following returns: Expected Return Under

Stock Boom Bust

A 15% -5%

B 0% 10%

What are the expected returns for each security?

What is the standard deviation of return for each security?

Which offers a better reward to risk ratio?

Is it possible to observe these reward-to-risk ratios in the market? Why or why not?

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