The following table shows the annual expected returns for two stocks. Probability of return Stock A Stock B 0.10 -3% -10% 0.20 2 1 0.40 7 8 0.20 12 16 0.10 17 24 Compare the risk and returk from Stock A, Stock B and the portfolio of both stocks. Where a profit maximizing risk taker will invest in? A different combination of Stock A and Stock B Portfolio Stock B Stock A -30 -15 Stock A Stock B 15 30 45 125 Which stock is riskier? Returns (%) Stock A is riskier than Stock B Stock B is riskier than Stock A Stock A and Stock B are not risky assets. Stock A and Stock B are equally risky. 60 Assume that a stock's return has the following distribution: Demand for the Company's Products Weak Below average Average Above average , Strong 2 15 Probability of this demand Occurring Rate of Return if this Demand Occurs 0.10 (30)% 0.20 (5) 0.40 10 0.20 16 0.10 40 Calculate the stock's expected return. 17.2% 8% 18 7.8% 21 6.5% Risk Premium is the excess return on risky assets the expected return on risky assets the portfolio return on risky assets the return on risk-free assets