In: Finance
Stocks A and B have the following probability distributions of expected future returns:
Probability | A | B |
0.2 | (12%) | (36%) |
0.3 | 6 | 0 |
0.2 | 14 | 24 |
0.1 | 22 | 28 |
0.2 | 31 | 36 |
Calculate the expected rate of return, , for Stock B ( =
10.60%.) Do not round intermediate calculations. Round your answer
to two decimal places.
%
Calculate the standard deviation of expected returns,
σA, for Stock A (σB = 25.58%.) 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 2.5%. 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?