6 Problem 8 06 (Expected Returns) eBook Stocks A and B have the following probability distributions of expected future returns Probability A B 0 2 (8 ) (37 ) 0 2 2 0 0 4 11 18 0 1 23 27 0 1 36 40 Calculate the expected rate of return, , for Stock B ( 9 10 ) Do not round intermediate calculations Round your answer to two decimal places Calculate the standard deviation of expected returns, A , for Stock A ( B 24 37 ) 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 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 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 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 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 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 Select IIIIIIIVVItem 4 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 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 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 higher beta than Stock A, and hence be more risky in a portfolio sense In a stand alone risk sense A is more 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 In a stand alone risk sense A is more risky 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 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 Select IIIIIIIVVItem 7

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6. Problem 8.06 (Expected Returns) eBook Stocks A and B have the following probability distributions of expected future returns: Probability A B 0.2 (8%) (37%)

6. Problem 8.06 (Expected Returns)

eBook

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

Probability	A	B
0.2	(8%)	(37%)
0.2	2	0
0.4	11	18
0.1	23	27
0.1	36	40

Calculate the expected rate of return, , for Stock B ( = 9.10%.) Do not round intermediate calculations. Round your answer to two decimal places. %
Calculate the standard deviation of expected returns, _A, for Stock A (_B = 24.37%.) 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?
1. 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.
2. 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.
3. 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.
4. 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.
5. 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.
-Select-IIIIIIIVVItem 4
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?
1. 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.
2. 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 higher beta than Stock A, and hence be more risky in a portfolio sense.
3. In a stand-alone risk sense A is more 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.
4. In a stand-alone risk sense A is more risky 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.
5. 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.
-Select-IIIIIIIVVItem 7