Problem: Given the following information, which one of these two stocks should you prefer and why?
Rate of Return if
State of Probability of State Occurs
Economy State of Economy Stock A Stock B
Boom 60% 9% 15%
Recession 40% 4% -6%
A. Stock A; because it has an expected return of 7% and appears to be more risky.
B. Stock A; because it has a higher expected return and appears to be less risky than stock B.
C. Stock A; because it has a slightly lower expected return but appears to be significantly less risky than stock B.
D. Stock B; because it has a higher expected return and appears to be just slightly more risky than stock A.
E. Stock B; because it has a higher expected return and appears to be less risky than stock A.