Question

EXPECTED RETURNS Stocks A and B have the following probability distributions of expected future returns: Probability A B 0.1 (14%) (29%) 0.2 3 0 0.4 13 23 0.2 24 27 0.1 35 37 Calculate the expected rate of return, rB, for Stock B (rA = 12.70%.) Do not round intermediate calculations. Round your answer to two decimal places. % Calculate the standard deviation of expected returns, σA, for Stock A (σB = 18.47%.) 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?   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. 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. 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. 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. 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.

Answer 1

ANSWER IN THE IMAGE ((YELLOW HIGHLIGHTED). FEEL FREE TO ASK ANY DOUBTS. THUMBS UP PLEASE.

1. 15.40%

2. 18.47%

3. 1.20

4. II. 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.

Less correlation with market gives the portfolio the benefit of diversification and hence reduce risk.