II 06 End-or-Chapter Problems. Risk and Rates of Return nur eyes 3. Problem 8.06 (Expected Returns) LA eBook Problem Walk-Through Stocks A and B have the following probability distributions of expected future returns: B (30%) Probability 0.1 0.1 0.6 0.1 0.1 (5%) 4 11 18 36 0 20 30 48 a. Calculate the expected rate of return, is, for Stock B (A - 11.90%.) Do not round intermediate calculations. Round your answer to two decimal places. b. Calculate the standard deviation of expected returns, or for Stock A (on - 19.19%.) Do not round Intermediate calculations. Round your answer to two decimal place % Now calculate the coefficient of variation for Stock B. Do not round Intermediate calculations. 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 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. II. 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 III. 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 IV. 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. V. 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. -Select- c. Assume the risk-free rate is 1.5%. What are the Sharpe ratios for Stocks A and B? Do not round Intermediate calculations. Round your answers to four decimal places Stock A: Stock B: Are these calculations consistent with the information obtained from the coefficient of variation calculations in Part ? 08: End-of-Chapter Problems - Risk and Rates of Return a. Calculate the expected rate of return, ro, for Stock B (PA- 11.90%.) Do not round Intermediate calculations. Round your answer to two decimal places. Search this course x b. Calculate the standard deviation of expected returns, On, for Stock A (0 - 19.19%.) Do not round intermediate calculations. Round your answer to two decimal place 9 Now calculate the coefficient of variation for Stock B. Do not round Intermediate calculations. 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 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 II. 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 It. 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. IV. 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. V. 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 -Select- c. Assume the risk-free rate is 1.5%. What are the Sharpe ratios for Stocks A and B? Do not round intermediate calculations. Round your answers to four decimal places Stock A: Stock B Are these calculations consistent with the information obtained from the coefficient of variation calculations in Part b? I. In a stand-alone risk sense A is more risky than 8. 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. II. In a stand-alone risk sense A is less risky than B. 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. III. In a stand-alone risk sense A is less risky than B. If Stock 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. IV. In a stand-alone risk sense A is less risky than B. 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. V. In a stand-alone risk sense A is more risky than B. 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. Select
