Evaluating risk and return

Expected return of Stock X $9\mathrm{.}50\%$

Beta coefficient of Stock X $0\mathrm{.}80$

Standard deviation of Stock X returns $35\mathrm{.}00\%$

Expected return of Stock Y $12\mathrm{.}00\%$

Beta coefficient of Stock Y $1\mathrm{.}10$

Standard deviation of Stock Y returns $25\mathrm{.}00\%$

Risk$-$free rate $($rRF$)6\mathrm{.}00\%$

Market risk premium $($RPM$)5\mathrm{.}00\%$

Dollars of Stock X in portfolio $$5,500\mathrm{.}00$

Dollars of Stock Y in portfolio $$2,000\mathrm{.}00$

Formulas

Coefficient of Variation for Stock X $0\mathrm{.}10=$B$11+$B$12*$B$4$

Coefficient of Variation for Stock Y $0\mathrm{.}12=$B$11+$B$12*$B$8$

Riskier stock to a diviersified investor STOCK X $=$IF$($B$3>$B$22,$"STOCK X$",$"STOCK Y$")$

Required return for Stock X $0\mathrm{.}00\%=$B$14/($B$14+$B$15)*$B$22+$B$15/($B$14+$B$15)*$B$23$

Required return for Stock Y #N$/$A

Stock more attractive to a diversified investor #N$/$A

Required return of portfolio containing

Stocks X and Y in amounts above #N$/$A

New market risk premium $6\mathrm{.}00\%$

With new market risk premium, stock with larger increase in required return #N$/$A

Check:

New required return, Stock X #N$/$A

Change in required return, Stock X #N$/$A

New required return, Stock Y #N$/$A

Change in required return, Stock Y #N$/$A

Stock with greater change in required return #N$/$A

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

CVx $=$ fill in the blank $2$

CVy $=$ fill in the blank $3$

b$.$ Which stock is riskier for a diversified investor?

I. For diversified investors the relevant risk is measured by beta. Therefore, the stock with the higher beta is less risky. Stock Y has the higher beta so it is less risky than Stock X$.$

II$.$ 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$.$

III. For diversified investors the relevant risk is measured by standard deviation of expected returns. Therefore, the stock with the higher standard deviation of expected returns is more risky. Stock X has the higher standard deviation so it is more risky than Stock Y$.$

IV$.$ For diversified investors the relevant risk is measured by beta. Therefore, the stock with the lower beta is more risky. Stock X has the lower beta so it is more risky than Stock Y$.$

V$.$ For diversified investors the relevant risk is measured by standard deviation of expected returns. Therefore, the stock with the lower standard deviation of expected returns is more risky. Stock Y has the lower standard deviation so it is more risky than Stock X$.$

c$.$ Calculate each stock's required rate of return. Round your answers to two decimal places.

rx $=$ fill in the blank $5\%$

ry $=$ fill in the blank $6\%$

d$.$ On the basis of the two stocks' expected and required returns, which stock would be more attractive to a diversified investor?