You are comparing Stock A to Stock B Given the following inf

You are comparing Stock A to Stock B. Given the following information, what is the difference in the expected returns of these two securities?

State of Economy	Probability of State of Economy	Rate of Return if State Occurs
		Stock A	Stock B
Normal	45%	12%	17%
Recession	55%	-22	-31

Solution

Statement showing computations Particulars Percentage Rate of return of A Weighted Return of A Normal 45% 12% 5.40% Recession 55% -22% -12.10% -6.70% Statement showing computations Particulars Percentage Rate of return of B Weighted Return of B Normal 45% 17% 7.65% Recession 55% -31% -17.05% -9.40% Diff in Expected Return = -6.70% - (-9.40%) 2.70%