Stocks A and B have the following probability distributions of expected future returns:

Probability	A		B
0.1	(14	%)	(35	%)
0.1	5		0
0.6	16		18
0.1	19		26
0.1	35		43

A. Calculate the expected rate of return, , for Stock B ( = 14.10%.) Do not round intermediate calculations. Round your answer to two decimal places.

%

B. Calculate the standard deviation of expected returns, _A, for Stock A (_B = 19.18%.) 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 lower beta than Stock A, and hence be less risky in a portfolio sense.
2. 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.
3. 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.
4. 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 riskier in a portfolio sense.
5. 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.

C. Assume the risk-free rate is 2.5%. 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: ____________

Are these calculations consistent with the information obtained from the coefficient of variation calculations in Part b?

6. 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 lower beta than Stock A, and hence be less risky in a portfolio sense.
7. 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.
8. 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 less risky in a portfolio sense.
9. 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 higher beta than Stock A, and hence be more risky in a portfolio sense.
10. In a stand-alone risk sense A is less risky than B. 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.