Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Stock X has a 9.5% expected return, a beta coefficient of 0.8, and a 40% standard deviation of expected returns. Stock Y has a 12.0%
Stock X has a 9.5% expected return, a beta coefficient of 0.8, and a 40% standard deviation of expected returns. Stock Y has a 12.0% expected return, a beta coefficient of 1.1, and a 25% standard deviation. The risk-free rate is 6%, and the market risk premium is 5%.
-
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 beta. Therefore, the stock with the lower beta is riskier. Stock X has the lower beta so it is riskier than Stock Y.
- 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.
-
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-Stock XStock YItem 6
- 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?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started