Stock X has a 10% expected return, a beta coefficient of 0.9, & a 35% standard d
ID: 2669114 • Letter: S
Question
Stock X has a 10% expected return, a beta coefficient of 0.9, & a 35% standard deviation of expected returns. Stock Y has a 12.5% expected return, a beta coefficient of 1.2, and a 25% standard deviation. The risk-free rate is 6%, & the market risk premium is 5%.a. Calculate each stock's coefficient of variation.
b. Which stock is riskier for a diversified investor?
c. Calculate each stock's required rate of return.
d. On the basis of the two stocks' expected and required returns, which stock would be more attractive to a diversified investor?
e. Calculate the required return of a portfolio that has $7,500 invested in Stock X and $2,500 invested in Stock Y.
f. If the market risk premium increased to 6%, which of the two stocks would have the larger increase in its required return?
Explanation / Answer
a Calculate each stock's coefficient of variation. CVX 3.5 CVY 2.0 b Which stock is riskier for a diversified investor? Y, since the beta is higher than X c Calculate each stock's required rate of return. rX 10.500% rY 12.000% d On the basis of the two stocks' expected and required returns, which stock would be more attractive to a diversified investor? Y since its expected return exceeds its required return. e Calculate the required return of a portfolio that has $7,500 invested in Stock X and $2,500 invested in Stock Y. X $7,500 Y $2,500 rp 10.875% f If the market risk premium increased to 6%, which of the two stocks would have the larger increase in its required return? Y, since its beta is higher
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