We know the following expected returns for stocks A and B, given different states of the economy: States(s) Probability E(rAS) E(rB,)
Recession 0.2 -0.1 0.04
Normal 0.5 0.08 0.05
Expansion 0.3 0.1 0.07
1. What is the expected return for stock A?
2. What is the expected return for stock B?

Expected Returns:

1. Stock A:

= (0.2 x 0.04) + (0.5 x 0.05) + (0.3 x 0.07)

= -0.02 + 0.04 + 0.12

= 0.14

= 14%

2. Stock B:

= (0.2 x -0.1) + (0.5 x 0.08) + (0.3 x 0.1)

= -0.008 + 0.025 + 0.021

= 0.054

= 5.4%

Explanation:

a) Data and Calculations:

States(s)                Probability       E(rAS)         E(rB,)

Recession                  0.2             -0.1             0.04

Normal                       0.5              0.08          0.05

Expansion                  0.3              0.1             0.07

b) An investor in Stock A's expected return is the sum of the returns under different economic scenarios of recession, normal economy, and expansion, weighed by the probabilities of each event, which the investor would expect to realize by making the investment in a security.  Stock A's expected return shows that the investor in the stock would expect a 14% return on the value of the investment.  Whereas, the same investor would expect a return of 5.4% in Stock B's investment.

the correct answer is economics is a game without winners or losers.

unlike sports or games economic is a game without losers or winner rather it is a game where everyone wins. parties of business doing businesses exchange money with each other and hence exchange is done on the basis of goods. one party takes the goods and other sales it so there is winner on both sides. each party values more highly the good it gets than the good it gives up. both sides exchange only because both intend to increase their value. so there is no concept of lose or win.