6. Problem 8.06 (Expected Returns) . A B Book Problem Walk-Through Stocks A and B have the following probability distributions of expected future returns: Probability 0.1 (8%) (40%) 0.2 0.4 18 0.2 20 25 0.1 48 a. Calculate the expected rate of return, F, for Stock B (FA- 13,80%) Do not round intermediate calculations, Round your answer to two decimal places 5 0 16 32 b. Calculate the standard deviation of expected returns, ou, for Stock A (O = 21.82%) Do not round intermediate calculations. Round your answer to two decimal places Now calculate the coefficient of variation for Stock B. 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? I. 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. If Stock B is loss 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 III, 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 IV. IF Stock is more highly correlated with the market than A, then it might have a lower beta thon Stock A, and hence be less risky in a portfolio sense V. If Stock 5 is more highly correlated with the market than A, then it might have the same bets as Stock A, and hence be just as risky in a portfolio sense Select C. Assume the risk-free rate is 1.5%. What are the Sharpe ratios 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? I. In a stand-alone risk sense A is less risky than B. 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 nisky than B. 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. m. In a stand-alone risk sense A is more risky thon B. 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 IV. In a stand-alone risk sense A is more risky than B. 1 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. V. In a stand-alone risk sense A is less risky than B. If Stock 8 is more highly correlated with the market than A, then it might have the same bata as Stock A, and hence be just as risky in a portfolio sense. Select
