g You are comparing Stock A to Stock B. Stock A will return 9 percent in a boom and 4 percent in a recession. Stock B will return 15 percent in a boom and lose 6 percent in a recession. The probability of a boom is 60 percent with a 40 percent chance of a recession. Given this information, which one of these two stocks should you prefer and why

Stock A; because it has a higher expected return and appears to be less risky than Stock B

Explanation:

The computation is shown below:

Expected return for stock A

= 9% × 60% + 4% × 40%

= 5.4% + 1.6%

= 7%

And, the expected return for stock B is

=  15% × 60% + -6% × 40%

= 9% -2.4%

= 6.6%

Based on this, as it can be seen that the expected return of Stock A is more than the stock B so it would be less risky.

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