Question

1. Stock X has a 10% expected return, a Beta coefficient of .9, and a 35% standard deviation of expected return. Stock Y has a 12.5% expected return, a bet coefficient of 2, and a 25% standard deviation. The risk free rate is 2% and the market risk premium is 5%
   1. Calculate each stock’s coefficient of variation.
   2. Which stock is riskier?
   3. Calculate each stock’s required rate of return.
   4. Calculate the required rate of return of a portfolio that has $7,500 invested in Stock X and $2,500 invested in Stock Y.

Answer 1

Stock		X		Y
expected return		10%		12.50%
standard deviation		35%		25%
co-effiecient of variation = standard deviation/expected return	10%/35%	29%	12.5%/25%	50%
which stock is riskier	stock X is more riskier as its standard deviation is more than standard deviation of Y. standard deviation is a measure of total risk related to investment.
standard deviation		35%		25%
required rate of return = risk free rate+(market risk premium)*beta   risk free rate = 2% market risk premium = 5% beta x = .9 beta y= 2	2+(5)*0.9	6.5	2+(5)*2	12
Portfolio return
stock	value	weight= value/total value of investment	rate of return	weight*rate of return
X	7500	0.75	6.50%	0.04875
Y	2500	0.25	12.00%	0.03
total	10000
Portfolio return = sum of weight*return	.075+.03125			7.88%