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Rate of Return if State Occurs State of Economy Probability of State of Economy Stock A Stock B Recession 0.20 0.06 -0.19 Normal 0.50 0.08

Rate of Return if State Occurs

State of Economy

Probability of State of Economy

Stock A

Stock B

Recession

0.20

0.06

-0.19

Normal

0.50

0.08

0.16

Boom

0.30

0.16

0.34

a. What is the expected return on Stock A?

b. What is the standard deviation of return on Stock B?

c. Which is riskier?

d If investors become more risk averse, what will happen to the price of stocks in general? Why?

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