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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
  1. 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. %

  2. 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. %

  3. Now calculate the coefficient of variation for Stock B. Round your answer to two decimal places.

  4. 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 a higher beta than Stock A, and hence be less risky in a portfolio sense.
    2. 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.
    3. 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.
    4. 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.
    5. 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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