Question

Problem 8-07 You are considering two stocks and have determined the following information: Stock A Return 26% Probability of the Return 35% 60 Stock B Return 30 % Probability of the Return 10 % 19 30 60 a. Which of the two stocks has the higher expected return? Round your answers to two decimal places. The return on Stock A: The return on Stock B: Stock A has the higher expected return. b. Which stock is riskier? Do not round intermediate calculations. Round your answers to two decimal places. Standard deviation of Stock A: Standard deviation of Stock B: Stock B i s riskier. C. Given your answers to the two previous questions, what stock is preferred? Stock is preferred

Answer 1

Inderdhanush Page Na DATE: DATE: 0 can calculation of Expected Return of the Stock A Edipu Stock A = 264.80.35+ 11 % x 0.60 +9 % X0.05 = 9.1006 +60644 +0.45%. = 16.15% = 16.15 % slev Expected Return B 10 ulov tovrch ERB § 30 Xelo + 19X0:30+ 7 x 0.60 300 +5.7 de + 4.2%. = 12.9% ERB - 12.9% CV Stock A, has the higher Expected Return I Calculation of Standared deviation SD - Return - Expected Return) x P hollin. Sed

Date Page deviation Calculation of Standard of stock A. Returns. Returns 26% 11% 9 ofo ERA deviation (P2 (dev) x p. 16.15 9.85% 0.35 33.958 16.15% - 5.15% 0.60 15.914 16.156% -7.156% 0.05 2.556 T Ă (vanance) 52.428 % ISDA 2 52.428 % 7.24% eviation for Calculation Stock Bs of Std Returns Returns 304. 19 4. 70% ERR 12.9+. 12.94 12.9%. deviation 17.104 6.1% -5.94 (P) (dev XP 0.10 29.2414 0.30 11.163% 0.60 20.886% sance) 61.2904 SDB = 61. 290 y. - 7.83%

Dare Page Based on Standered deviation Stock B is Riskier, because of wts lugher Standared deviation © Stock B Expected Return Standared (dev Stock A 16.15%. 7.24•%. 12.9% 7.83% Calculation of correlation co-efficient CVA CVB SA - 96.65 12.90 a 2123 1.65 = 7.83 Based on risk & Return, Stock A. is preferred, because; It has higher: Expected return per unit of Standered deviation