In: Finance
EVALUATING RISK AND RETURN
Stock X has a 10.5% expected return, a beta coefficient of 1.0, and a 35% standard deviation of expected returns. Stock Y has a 12.5% expected return, a beta coefficient of 1.2, 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?
Calculate each stock's required rate of return. Round your answers to two decimal places.
rx = %
ry = %
Calculate the required return of a portfolio that has $7,000 invested in Stock X and $6,500 invested in Stock Y. Do not round intermediate calculations. Round your answer to two decimal places.
rp = %
1.
=35%/10.5%=3.33333333333333
2.
=30%/12.5%=2.40
3.
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.
4.
=6%+1.0*5%=11.00000%
5.
=6%+1.2*5%=12.00000%
6.
Stock Y
7.
=(7000*11%+6500*12%)/(7000+6500)
=11.48148%
8.
Stock Y