EXPECTED RETURNS Stocks A and B have the following probability distributions of expected future returns Probability A B 0 2 (14 ) (35 ) 0 2 4 0 0 3 12 20 0 2 18 29 0 1 30 42 Calculate the expected rate of return, r B , for Stock B (r A 8 20 ) Do not round intermediate calculations Round your answer to two decimal places Calculate the standard deviation of expected returns, A , for Stock A ( B 25 07 ) Do not round intermediate calculations Round your answer to two decimal places Now calculate the coefficient of variation for Stock B Round your answer to two decimal places Is it possible that most investors might regard Stock B as being less risky than Stock A 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 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 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 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 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

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EXPECTED RETURNS

Stocks A and B have the following probability distributions of expected future returns:

Calculate the expected rate of return, r_B, for Stock B (r_A = 8.20%.) Do not round intermediate calculations. Round your answer to two decimal places. %
Calculate the standard deviation of expected returns, _A, for Stock A (_B = 25.07%.) Do not round intermediate calculations. Round your answer to two decimal places. %
Now calculate the coefficient of variation for Stock B. 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.
2. 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.
3. 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.
4. 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.
5. 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.