Question

< Back to Assignment Attempts: 5. Problem 8.06 Keep the Highest: /4 Click here to read the eBook: Stand-Alone Risk EXPECTED RETURNS Stocks A and B have the following probability distributions of expected future returns Probability 0.1 (11% ) (30%) 0.2 5 0.4 10 21 0.2 19 28 0.1 30 42 a. Calculate the expected rate of return, rB. for Stock B (rA 10.70% . ) Do not round intermediate calculations. Round your answer to two decimal places. % b. Calculate the standard deviation of expected returns, oA, for Stock A (as 19.20% .) Do not round intermediate calculations. Round your answer to two decimal places. c. Now calculate the coefficient of variation for Stock B. Round your ansvwer to two decimal places. d. Is it possible that most investors might regard Stock B as being less risky than Stock A? I. 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. I1. If Stock B is less highly correlated with the market than A, then it might have a higher beta than Stock A, and heence be more risky in a portfolio sense. III. If Stock B is more highly correlated veith the market than A, then it might have a higher beta than Stock A, and hence be less risky in a portfolio sense. IV. 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. V. 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. ESlect Continue without saving PType here to search

Answer 1

Expected returns=Sum(probability*returns)
Standard deviation=sqrt(sum(probability*(returns-expected returns)^2))
Coefficient of variation=Standard Deviation/Expected returns

1.
=0.1*(-30%)+0.2*(0%)+0.4*(21%)+0.2*(28%)+0.1*(42%)=15.20%

2.
=sqrt(0.1*(-11%-10.70%)^2+0.2*(5%-10.70%)^2+0.4*(10%-10.70%)^2+0.2*(19%-10.70%)^2+0.1*(30%-10.70%)^2)=10.24%

3.
=19.20%/15.20%=1.263157895

4.
If Stock B is less highly correlated with the market than A, then it might have a lower beta than Stock A, and hence less risky in a portfolio sense.