Chapter 8 Risk and Rates of Return 295 Intermediate 8-6 Problems 6-12 EXPECTED RETURNS Stocks X and Y have the following probability distributions of expected future returns: Probability X 0.1 (1096) (35%) 0.4 0.2 0.1 12 20 25 45 38 Calculate the expected rate of return, ry, for Stock Y (n(# 1296). Calculate the standard deviation of expected returns, ?x' for Stock X (Oy = 20.35%). Now calculate the coefficient of variation for Stock Y. Is it possible that most investors will regard Stock Y as being less risky than Stock X? Explain. a. b. 8-7 PORTFOLIO REQUIRED RETURN Su you are the money manager of a $4 million investment fund. The fund consists of four stocks with the following investments and betas: Stock Investment $ 400,0001.50 600,000 (050) 1,000,000 1.25 2,000,000 0.75 If the market's required rate of return is 14% and the risk-free rate is 6%, what is the fund's required rate of return? BETA COEFFICIENT Given the following information, determine the beta coefficient for Stock J that is consistent with equilibrium: ? 8-8 12.5%; rRF-4.5%; rM-|0596. REQUIRED RATE OF RETURN required return on an average stock is does the required return on the riskier stock exceed the required retum on the less risky stock? 8-9 Stock R has a beta of 1.5, Stock S has a beta of 0.75, the 13%, and the risk-free rate of return is 7%. By how much