Question
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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