Economy Pi Ra Rb
BOOM .40 30% -5%
BUST .60 -10% 25%
Expected Return?
Risk?
- E(Ra)=(.4)(.3)+(.6)(-.1)=6%
- E(Rb)=(.4)(-.05)+(.6)(.25)=13%
B has Higher Return
- VarA=(.4)(.3-.06)2+(.6)(-.1-.06)2 =.0384
- oA=Square root of .0384
- =.196=19.6%
- VarB=(.4)(-.05-.13)2 +(.6)(.25-.13)2 =.0216
- oB= Square root of .0216
- =.147=14.7%