The distributions of rates of return for Companies AA and BB are given below: $\begin{array}{lcccc}
\text { State of } & \text {Probability of } \
{\text { Economy }} & \text { State Occurring } & \text { A.A } & \text { B B } \
\hline \text { Boom } & 0.2 & 30 \% & -10 \% \
\text { Normal } & 0.6 & 10 \% & 5 \% \
\text { Recession } & 0.2 & -5 \% & 50 \%
\end{array}$ We can conclude from the above information that any rational risk-averse investor will add 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:​ $\begin{array}{lcccc}
 \text { State of } & \text {Probability of } \
{\text { Economy }} & \text { State Occurring } & \text { A.A } & \text { B B } \
\hline \text { Boom } & 0.2 & 30 \% & -10 \% \
\text { Normal } & 0.6 & 10 \% & 5 \% \
\text { Recession } & 0.2 & -5 \% & 50 \%
\end{array}$ We can conclude from the above information that any rational risk-averse investor will add Security AA to a well-diversified portfolio over Security BB.

Quizplus · Accepted Answer

A rational risk-averse investor would consider both the expected return and the risk (variability) of returns. The information provided does not give enough detail about the investor's current portfolio diversification, risk tolerance, or how these securities correlate with the rest of the portfolio, making it impossible to conclude definitively that AA is preferred over BB without additional context.

The Distributions of Rates of Return for Companies AA and BB