Question
EXPECTED RETURNS Stocks A and B have the following probability distributions of expected future returns: Probability A B 0.1 (7%) (29%) 0.2 4 0 0.4
EXPECTED RETURNS
Stocks A and B have the following probability distributions of expected future returns:
Probability | A | B |
0.1 | (7%) | (29%) |
0.2 | 4 | 0 |
0.4 | 15 | 20 |
0.2 | 24 | 26 |
0.1 | 28 | 40 |
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Calculate the expected rate of return, rB, for Stock B (rA = 13.70%.) Do not round intermediate calculations. Round your answer to two decimal places. %
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Calculate the standard deviation of expected returns, A, for Stock A (B = 18.30%.) Do not round intermediate calculations. Round your answer to two decimal places. %
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Now calculate the coefficient of variation for Stock B. Round your answer to two decimal places.
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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 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.
- 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.
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