5. Consider the following information (returns are measured on an annual basis): State of Economy Probability of State of Economy Rate of Return if State Occurs - Investment A Rate of Return if State Occurs - Investment B Recession 0.2 5% -21% Normal 0.6 8% 14% Boom 0.2 12% 35% a. Calculate the expected return and the standard deviation for Investment A. b. Calculate the expected return and the standard deviation for Investment B.

1. Which investment do you prefer, A or B, and why?
2. Assume that returns on Investments A and B is normally distributed.
   1. with 95.44% confidence, we should expect the return on Investment A to be in a range of _____ (lower bound) and ____ (upper bound).
   2. What is the confidence level that corresponds to a range of returns of -20% to +20% for Investment B (Hint: use NORMDIST in Excel).