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In: Finance

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

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

Probability A B
0.1 (14%) (23%)
0.2 2 0
0.4 14 18
0.2 22 30
0.1 31 49
  1. Calculate the expected rate of return, rB, for Stock B (rA = 12.10%.) Do not round intermediate calculations. Round your answer to two decimal places.
    %

  2. Calculate the standard deviation of expected returns, σA, for Stock A (σB = 18.79%.) 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 the same beta as Stock A, and hence be just as risky in a portfolio sense.
    2. 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.
    3. 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.
    4. 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.
    5. 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.


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