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B 0.1 eBook Problem Walk-Through Stocks A and B have the following probability distributions of expected future returns: Probability (14%) (39%) 0.1 2 0 0.5

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B 0.1 eBook Problem Walk-Through Stocks A and B have the following probability distributions of expected future returns: Probability (14%) (39%) 0.1 2 0 0.5 24 0.2 29 0.1 34 46 a. Calculate the expected rate of return, FB, for Stock B (PA = 13.30%.) Do not round Intermediate calculations. Round your answer to two decimal places % b. Calculate the standard deviation of expected returns, or for Stock A (O. = 21.86%.) Do not round Intermediate calculations. Round your answer to two decimal places. 15 18 % 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 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. 11. 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. III. 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. IV. 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. hinh correlated with the market than A then it might have a lower beta than Stock and hence be less risky in 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 the same beta as Stock A, and hence be just as risky in a portfolio sense. II. 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. III. 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. IV. 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. V. 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. Select- c. Assume the risk-free rate is 4.5%. 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 coefficiert of variation calculations in Part b? 1. 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. II. In a stand-alone risk sense A is less risky than 3. 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. III. 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. IV. In a stand-alone risk sense A is more 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. V. 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. BY

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