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problem 8.6 Expected returns Stocks A and B have the following probability distributions of expected future returns: Probability A B 0.2 -9% -25% 0.2 2

problem 8.6 Expected returns

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

Probability A B
0.2 -9% -25%
0.2 2 0
0.3 15 18
0.2 19 27
0.1 28 48

Calculate the expected rate of return, rB, for Stock B (rA = 9.70%.) Do not round intermediate calculations. Round your answer to two decimal places. %

Calculate the standard deviation of expected returns, A, for Stock A (B = 22.05%.) 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? (choose the correct answer below)

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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