In: Finance
Stocks A and B have the following probability distributions of expected future returns:
Probability | A | B |
0.3 | (13%) | (30%) |
0.2 | 3 | 0 |
0.1 | 11 | 20 |
0.2 | 22 | 25 |
0.2 | 36 | 41 |
Calculate the expected rate of return, , for Stock B ( = 9.40%.)
Do not round intermediate calculations. Round your answer to two
decimal places.
%
Calculate the standard deviation of expected returns,
σA, for Stock A (σB = 27.07%.) 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?
Assume the risk-free rate is 2.0%. What are the Sharpe ratios for Stocks A and B? Do not round intermediate calculations. Round your answers to two decimal places.
Stock A:
Stock B:
Are these calculations consistent with the information obtained from the coefficient of variation calculations in Part b?