8. Evaluating risk and return

Stock X has a 10.5% expected return, a beta coefficient of 1.0, and a 30% standard deviation of expected returns. Stock Y has a 13.0% expected return, a beta coefficient of 1.3, and a 25.0% standard deviation. The risk-free rate is 6%, and the market risk premium is 5%.

Calculate each stock's coefficient of variation. Round your answers to two decimal places. Do not round intermediate calculations. CVx = CVy =

Which stock is riskier for a diversified investor? Answer: For diversified investors the relevant risk is measured by beta. Therefore, the stock with the higher beta is more risky. Stock Y has the higher beta so it is more risky than Stock X.

Calculate each stock's required rate of return. Round your answers to two decimal places. rx = ry =

On the basis of the two stocks' expected and required returns, which stock would be more attractive to a diversified investor? Answer: Stock Y

Calculate the required return of a portfolio that has $6,000 invested in Stock X and $4,500 invested in Stock Y. Do not round intermediate calculations. Round your answer to two decimal places. rp =

If the market risk premium increased to 6%, which of the two stocks would have the larger increase in its required return? Answer:Stock Y