WINNER plans to invest in one of two stocks, each of which requires the same initial investment. The estimated return (cash flow) of these investments for the next year depends on economic conditions and their respective possibilities.State ofEconomyProbabilityRate of ReturnStock AStock BBoom0.150.300.25Normal0.550.120.08Recession0.300.01-0.05 i) Compute expected rate of return for each asset.ii) Compute variance and standard deviation of rate of return for each asset.iii) Which asset should they purchase?

Answered: WINNER plans to invest in one of two…

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter2: Risk And Return: Part I

Section: Chapter Questions

Problem 13P

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WINNER plans to invest in one of two stocks, each of which requires the same initial investment. The estimated return (cash flow) of these investments for the next year depends on economic conditions and their respective possibilities.

State of Economy	Probability	Rate of Return
Stock A	Stock B
Boom	0.15	0.30	0.25
Normal	0.55	0.12	0.08
Recession	0.30	0.01	-0.05

i) Compute expected rate of return for each asset.

ii) Compute variance and standard deviation of rate of return for each asset.

iii) Which asset should they purchase?

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