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Problem 8-6 Expected returns Stocks X and Y have the following probability distributions of expected future returns: Probability X Y 0.1 -9% -35% 0.2 5

Problem 8-6 Expected returns

Stocks X and Y have the following probability distributions of expected future returns:

Probability X Y
0.1 -9% -35%
0.2 5 0
0.3 14 19
0.2 18 25
0.2 35 47

Calculate the expected rate of return, rY, for Stock Y (rX = 14.90%.) Round your answer to two decimal places. %

Calculate the standard deviation of expected returns, X, for Stock X (Y = 22.85%.) Round your answer to two decimal places. %

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

Is it possible that most investors might regard Stock Y as being less risky than Stock X?

If Stock Y is less highly correlated with the market than X, then it might have a higher beta than Stock X, and hence be more risky in a portfolio sense.

If Stock Y is more highly correlated with the market than X, then it might have a higher beta than Stock X, and hence be less risky in a portfolio sense.

If Stock Y is more highly correlated with the market than X, then it might have a lower beta than Stock X, and hence be less risky in a portfolio sense.

If Stock Y is more highly correlated with the market than X, then it might have the same beta as Stock X, and hence be just as risky in a portfolio sense.

If Stock Y is less highly correlated with the market than X, then it might have a lower beta than Stock X, and hence be less risky in a portfolio sense.

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