Question

8.06

EXPECTED RETURNS

Stocks A and B have the following probability distributions of expected future returns:

Probability	A	B
0.1	(12%)	(20%)
0.2	6	0
0.3	15	19
0.3	24	30
0.1	34	48

1. Calculate the expected rate of return, r_B, for Stock B (r_A = 15.10%.) Do not round intermediate calculations. Round your answer to two decimal places.
   %

2. Calculate the standard deviation of expected returns, σ_A, for Stock A (σ_B = 18.51%.) Do not round intermediate calculations. Round your answer to two decimal places.
   %

3. Now calculate the coefficient of variation for Stock B. Round your answer to two decimal places.

4. Is it possible that most investors might regard Stock B as being less risky than Stock A?

   1. If Stock B is more highly correlated with the market than A, then it might have a higher beta than Stock A, and hence be less risky in a portfolio sense.
   2. 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.
   3. 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.
   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 be less risky in a portfolio sense.
   5. If Stock B is less highly correlated with the market than A, then it might have a higher beta than Stock A, and hence be more risky in a portfolio sense.

Answer 1