7 6 Stocks A and B have the following probability distributions of expected future returns Probability A B 0 1 (11 ) (27 ) 0 2 2 0 0 4 13 18 0 2 23 30 0 1 32 36 Calculate the expected rate of return, , for Stock B ( 12 30 ) Do not round intermediate calculations Round your answer to two decimal places Calculate the standard deviation of expected returns, A , for Stock A ( B 17 70 ) 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 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 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 Select IIIIIIIVVItem 4 Assume the risk free rate is 3 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 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 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 Select IIIIIIIVVItem 7

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7.6 Stocks A and B have the following probability distributions of expected future returns: Probability A B 0.1 (11 %) (27 %) 0.2 2 0

7.6

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

Probability	A		B
0.1	(11	%)	(27	%)
0.2	2		0
0.4	13		18
0.2	23		30
0.1	32		36

Calculate the expected rate of return, , for Stock B ( = 12.30%.) Do not round intermediate calculations. Round your answer to two decimal places.
%
Calculate the standard deviation of expected returns, _A, for Stock A (_B = 17.70%.) 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?
1. 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. 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. 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.
4. 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.
5. 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 4
Assume the risk-free rate is 3.5%. 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?
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 higher beta than Stock A, and hence be more risky in a portfolio sense.
2. 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.
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 higher beta than Stock A, and hence be more risky in a portfolio sense.
4. 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.
5. 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.
-Select-IIIIIIIVVItem 7