Question
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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