Stock X has a 9.5% expected return, a beta coefficient of 0.8, and a 40% standar
ID: 2783722 • Letter: S
Question
Stock X has a 9.5% expected return, a beta coefficient of 0.8, and a 40% standard deviation of expected returns. Stock Y has a 13.0% expected return, a beta coefficient of 1.3, and a 30.0% standard deviation. The risk-free rate is 6%, and the market risk premium is 5%.
Calculate each stock's coefficient of variation. Round your answers to two decimal places. Do not round intermediate calculations.
CVx =
CVy =
Which stock is riskier for a diversified investor?
1 For diversified investors the relevant risk is measured by beta. Therefore, the stock with the higher beta is more risky. Stock Y has the higher beta so it is more risky than Stock X.
2 For diversified investors the relevant risk is measured by standard deviation of expected returns. Therefore, the stock with the higher standard deviation of expected returns is more risky. Stock X has the higher standard deviation so it is more risky than Stock Y.
3 For diversified investors the relevant risk is measured by beta. Therefore, the stock with the lower beta is more risky. Stock X has the lower beta so it is more risky than Stock Y.
4 For diversified investors the relevant risk is measured by standard deviation of expected returns. Therefore, the stock with the lower standard deviation of expected returns is more risky. Stock Y has the lower standard deviation so it is more risky than Stock X.
5 For diversified investors the relevant risk is measured by beta. Therefore, the stock with the higher beta is less risky. Stock Y has the higher beta so it is less risky than Stock X.
select 1 2 3 4 or 5 from above
Calculate each stock's required rate of return. Round your answers to two decimal places.
rx = %
ry = %
On the basis of the two stocks' expected and required returns, which stock would be more attractive to a diversified investor?
-Select- Stock X or Stock Y
Calculate the required return of a portfolio that has $9,500 invested in Stock X and $3,500 invested in Stock Y. Do not round intermediate calculations. Round your answer to two decimal places.
rp = %
If the market risk premium increased to 6%, which of the two stocks would have the larger increase in its required return?
-Select-Stock X or Stock Y
Explanation / Answer
Which stock is riskier for a diversified investor?
1 For diversified investors the relevant risk is measured by beta. Therefore, the stock with the higher beta is more risky. Stock Y has the higher beta so it is more risky than Stock X.
It is so because if a stock is diversified its own risk is negligible.
Stock Y becaus eit has a higher beta
X Y ER 9.5 13 Beta 0.8 1.3 SD 40 30 cv 0.2375 0.4333Related Questions
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