4. Problem 8.06 (Expected Returns) eBook Problem Walk-Through Stocks A and B have the following probability distributions of expected future returns: Probability A 0.1 (15%) (27%) 0.2 4 0 0.4 14 23 0.2 21 29 0.1 32 36 a. Calculate the expected rate of retum, is, for Stock B(A - 12.30%..) Do not round intermediate calculations. Round your answer to two decimal places % b. Calculate the standard deviation of expected returns, on for Stock A cu = 18.15%.) Do not round intermediate calculations. Round your answer to two decimal places. % Now calculate the coefficient of variation for Stock 8. Do not round intermediate calculations. Round your answer to two decimal places. Is it possible that most investors might regard Stock B as being less risky than Stock A? 1. If Stock B is less highly correlated with the market than then it might have a higher beta than Stock A, and hence be more risky in a portfolio sense IL. I 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. III. 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 IV. If Stock 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 V. If Stock 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 Set c. Assume the risk-free rate is 4.5%. What are the Sharpe ratlos for Stocks A and B? Do not round intermediate calculations. Round your answers to four decimal places. Stock A: Stock B Are these calculations consistent with the information obtained from the coefficient of variation calculations in Part b? 1. In a stand-alone risk sense A is less risky than 8. 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 11. In a stand-alone risk sense A is less risky than B. Stock 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. m. In a standalone disk sense A is more risky than B. of stock is less highly correlated with the market than A, then it right have a lower beta than stoo, and hence be less risky in a portfolio sense. IV. In a standalone risk sense A is more risky than B. 11 Stock o 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. In a stand-alone risk sense A is less risky than B. 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
