The distributions of rates of return for Companies AA and BB are given below:
? $$\begin{array} { l l r r }
\text { State of the } & \text { Probability of } & & \
\text { Economy } & \text { This State Occurring } & \underline { \text { AA } } & \underline { \text { B B } } \
\text { Boom } & 0.2 & 30 \% & - 10 \% \
\text { Normal } & 0.6 & 10 \% & 5 \% \
\text { Recession } & 0.2 & - 5 \% & 50 \%
\end{array}$$
?
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.

Question

The distributions of rates of return for Companies AA and BB are given below:
? $$\begin{array} { l l r r } 
\text { State of the } & \text { Probability of } & & \
\text { Economy } & \text { This State Occurring } & \underline { \text { AA } } & \underline { \text { B B } } \
\text { Boom } & 0.2 & 30 \% & - 10 \% \
\text { Normal } & 0.6 & 10 \% & 5 \% \
\text { Recession } & 0.2 & - 5 \% & 50 \%
\end{array}$$ 
?
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.

Quizplus · Accepted Answer

The decision for a risk-averse investor to add Security AA or BB to a well-diversified portfolio depends on the expected return and risk (volatility) of each security. Without calculating and comparing these metrics (expected return, variance, and standard deviation), we cannot conclusively determine which security is better for a risk-averse investor.

The Distributions of Rates of Return for Companies AA and BB