Which of the following is true given various states of the economy?
A) The various economic states of the economy are generally equally likely to occur in any given year
B) Most stocks tend to have the same return regardless of the economic state
C) The expected state of the economy can have a major impact on the expected return on a portfolio
D) If the economy moves into a recession period from a normal period, all stocks will have lower expected returns
E) A change in the probability of a state of the economy occurring has no impact on the expected return on a portfolio of risky assets

Question

Quizplus · Accepted Answer

The expected state of the economy can have a major impact on the expected return on a portfolio. This is because different economic states may favor certain industries or sectors, and companies within those industries may perform differently. For example, during a recession, consumer staples companies may perform better as people tend to cut back on discretionary spending, while luxury goods companies may perform worse. Therefore, a portfolio that is diversified across different industries and sectors may have a different expected return depending on the expected state of the economy. Choices A, B, D, and E are all incorrect as they do not accurately reflect the relationship between the state of the economy and the expected return on a portfolio.

Which of the Following Is True Given Various States of the Economy