The distributions of rates of return for Companies AA and BB are given below:
$$\begin{array} { l l l r }
\text { State of the } &{ \text { Prabability of } } \
\text { Economy } & \text { This State Occurrine } & \mathrm { AA } & \underline { \mathrm { BB } } \
\text { Bonm } & 0.2 & 30 \% &-10 \% \
\text { Narmal } & 0.6 & 10 \% & 5 \% \
\text { Recesfion } & 0.2 & - 5 \% & 50 \%
\end{array}$$
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:
 $$\begin{array} { l l l r } 
\text { State of the } &{ \text { Prabability of } } \
\text { Economy } & \text { This State Occurrine } & \mathrm { AA } & \underline { \mathrm { BB } } \
 \text { Bonm } & 0.2 & 30 \%  &-10 \% \
\text { Narmal } & 0.6 & 10 \% & 5 \% \
\text { Recesfion } & 0.2 & - 5 \% & 50 \%
\end{array}$$ 
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 stocks have the same expected returns, but BB does badly in booms and well in recessions. Therefore, it would do more to reduce risk.

The Distributions of Rates of Return for Companies AA and BB