Stocks A and B have the following probability distributions of expected future r
ID: 2780977 • Letter: S
Question
Stocks A and B have the following probability distributions of expected future returns:
Calculate the expected rate of return, rB, for Stock B (rA = 10.90%.) Do not round intermediate calculations. Round your answer to two decimal places.
%
Calculate the standard deviation of expected returns, A, for Stock A (B = 18.29%.) Do not round intermediate calculations. Round your answer to two decimal places.
%
Now calculate the coefficient of variation for Stock B. Round your answer to two decimal places.
Is it possible that most investors might regard Stock B as being less risky than Stock A?
a). If Stock B is more highly correlated with the market than A, then it might have a higher beta than Stock A, and hence be less risky in a portfolio sense.
b). If Stock B is more highly correlated with the market than A, then it might have a lower beta than Stock A, and hence be less risky in a portfolio sense.
c). If Stock B is more highly correlated with the market than A, then it might have the same beta as Stock A, and hence be just as risky in a portfolio sense.
d). If Stock B is less highly correlated with the market than A, then it might have a lower beta than Stock A, and hence be less risky in a portfolio sense.
e). If Stock B is less highly correlated with the market than A, then it might have a higher beta than Stock A, and hence be more risky in a portfolio sense.
Probability A B 0.1 (11%) (27%) 0.2 2 0 0.4 10 24 0.2 21 28 0.1 34 37Explanation / Answer
Expected return of B = 16.20%
Standard dev of A = 11.74%
COV of B = 18.29/16.20 = 1.13
d). If Stock B is less highly correlated with the market than A, then it might have a lower beta than Stock A, and hence be less risky in a portfolio sense.
p(x) return 0.1 -27.00% 0.2 0.00% 0.4 24.00% 0.2 28.00% 0.1 37.00%Related Questions
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