Question
Stock Xhas a 10% expected return, a beta coefficient of0.9, and a 35% standard deviation of expected returns. Stock Yhas a 12.5% expected return, a
Stock Xhas a 10% expected return, a beta coefficient of0.9, and a 35% standard deviation of expected returns. Stock Yhas a 12.5% expected return, a beta coefficient of 1.2, and a 25% standard deviation. The risk-free rate is 6%, and themarket risk premium is 5%.a)Calculate each stock's coefficient of variation.b)Which stock is riskier for a diversified investor?c)Calculate each stock's required rate of return.d)On the basis of the two stocks' expected and required returns, which stock would bemore attractive to a diversified investor?e)Calculate the required return of a portfolio that has Br. 7,500 invested in Stock XandBr. 2,500 invested in Stock Y.f)If the market risk premium increased to 6%, which of the two stocks would have thelarger increase in its required return?
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