Question
what is E and F
How might your decision be affected if, rather than buying one stock for $0.5 million, You could construct a portfolio consisting of 100 stocks with $ 5,000 invested in each? Each of these stocks has the same return characteristics as the one stock - that is, a 50-50 chance of being worth zero or $11,500 at year-end. Would the correlation between returns on these stocks matter? Explain. EVALUATING RISK AND RETURN Stock x has a 10% expected return, a beta coefficient of 0.9, and a 35% standard deviation of expected returns. Stock y has 12.5% expected return, a beta coefficient of 1.2, and a 25% standard deviation. The risk-free rate is 6% and 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
E) return for X=6+0.9*5=10.5%
Return for Y=6+1.2*5=12%
7500*0.105 +2500*0.12=787.5+300=1087.5 i.e. 10.875 %
F)Stock Y has higher beta hence will have higher increase in required return.
