Question
Stock X has a 9.0% expected return, a beta coefficient of 0.7, and a 35% standard deviation of expected returns. Stock Y has a 13.0%
Stock X has a 9.0% expected return, a beta coefficient of 0.7, and a 35% standard deviation of expected returns. Stock Y has a 13.0% expected return, a beta coefficient of 1.3, and a 25% standard deviation. The risk-free rate is 6%, and the market risk premium is 5%.
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Calculate each stock's coefficient of variation. Do not round intermediate calculations. Round your answers to two decimal places.
CVx =
CVy =
- Which stock is riskier for a diversified investor?
- For diversified investors the relevant risk is measured by standard deviation of expected returns. Therefore, the stock with the lower standard deviation of expected returns is riskier. Stock Y has the lower standard deviation so it is riskier than Stock X.
- For diversified investors the relevant risk is measured by beta. Therefore, the stock with the higher beta is less risky. Stock Y has the higher beta so it is less risky than Stock X.
- For diversified investors the relevant risk is measured by beta. Therefore, the stock with the higher beta is riskier. Stock Y has the higher beta so it is riskier than Stock X.
- For diversified investors the relevant risk is measured by standard deviation of expected returns. Therefore, the stock with the higher standard deviation of expected returns is riskier. Stock X has the higher standard deviation so it is riskier than Stock Y.
- For diversified investors the relevant risk is measured by beta. Therefore, the stock with the lower beta is riskier. Stock X has the lower beta so it is riskier than Stock Y.
-Select-
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Calculate each stock's required rate of return. Round your answers to one decimal place.
rx = %
ry = %
- On the basis of the two stocks' expected and required returns, which stock would be more attractive to a diversified investor?
-Select-
- Calculate the required return of a portfolio that has $9,000 invested in Stock X and $3,000 invested in Stock Y. Do not round intermediate calculations. Round your answer to two decimal places.
rp = %
- If the market risk premium increased to 6%, which of the two stocks would have the larger increase in its required return?
-Select- Stock X or Stock Y I
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