Stocks A and B have the following probability distributions of expected future returns: Probability 0.1 0.2 0.4 11 21 0.2 19 27 0.1 31 a. Calculate the expected rate of return, FB, for Stock B (FA- 11.00%) Do not round intermediate calculations. Round your answer to two decimal places b. Calculate the standard deviation of expected returns, da, for Stock A (os- 20.65%.) Do not round intermediate calculations. Round your answer to two decimal places. % Now calculate the coefficient of variation for Stock B. Do not round intermediate calculations. Round your answer to two decimal places. Is it possible that most investors might regard Stock B as being less risky than Stock A? 1. If Stock B is more highly correlated with the market than A, then it might have a higher beta than Stock A, and hence be less risky in a portfolio sense. 11. If Stock 8 is more highly correlated with the market than A, then it might have a lower beta than Stock A, and hence be less risky in a portfolio sense III. If Stock B is more highly correlated with the market than A, then it might have the same bete as Stock A, and hence be just as risky in a portfolio sense IV. If Stock B is less highly correlated with the market than A, then it might have a lower beta than Stock A, and hence be less risky in a portfolio sense.. V. If Stock B is less highly correlated with the market than A, then it might have a higher beta than Stock A, and hence be more risky in a portfolio sense. c. Assume the risk-free rate is 4.5%. What are the Sharpe ratios for Stocks A and B Do not round intermediate calculations. Round your answers to four decimal places. Stock A Stock B A (7%) 2 (36%) 0 Are these calculations consistent with the information obtained from the coefficient of variation calculations in Part b? 1. In a stand-alone risk sense A is less risky than B. If Stock B is less highly correlated with the market than A, then it might have a higher beta than Stock A, and hence be more risky in a portfolio sense. II. In a stand-alone risk sense A is more risky than B. If Stock B is less highly correlated with the market than A, then it might have a lower beta than Stock A, and hence be risky in portfolio sense. III. In a stand-alone risk sense A is more risky than 8. If Stock B is less highly correlated with the market than A, then it might have a higher beta than Stock A, and hence be more risky in a portfolio sense. IV. In a stand-alone risk sense A is less risky than 8. If Stock B is more highly correlated with the market than A, then it might have the same beta as Stock A, and hence be just as risky in a portfolio sense. V. In a stand-alone risk sense A is less risky than less risky in a portfolio sense. If Stock B is less highly correlated with the market than A, then it might have a lower beta than Stock A, and hence be
