Evaluating risk and return Expected return of Stock X Beta coefficient of Stock X Standard deviation of Stock X returns 9.50% 0.80 35.00% Expected return of Stock Y Beta coefficient of Stock Y Standard deviation of Stock Y returns 12.50% 1.20 30.00% 6.00% Risk-free rate (TRF) Market risk premium (RPM) 5.00% Dollars of Stock X in portfolio Dollars of Stock Y in portfolio $9,500.00 $7,500.00 Formulas Coefficient of Variation for Stock X Coefficient of Variation for Stock Y 3.68 2.40 =B5/B3 =B9/B7 Riskier stock to a diviersified investor #N/A Required return for Stock X Required return for Stock Y 10.00% 12.00% =B11+B4*B12 =B11+B8*B12 Stock more attractive to a diversified investor #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 6.00% With new market risk premium, stock with larger increase in required return #N/A Check: New required return, Stock X Change in required return, Stock X #N/A #N/A New required return, Stock Y Change in required return, Stock Y #N/A #N/A Stock with greater change in required return #N/A