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Stocks A and B have the following probability distributions of expected future returns: Probability A B 0.1 (5 %) (32 %) 0.2 2 0 0.5
Stocks A and B have the following probability distributions of expected future returns:
Probability | A | B | ||
0.1 | (5 | %) | (32 | %) |
0.2 | 2 | 0 | ||
0.5 | 13 | 20 | ||
0.1 | 23 | 28 | ||
0.1 | 32 | 45 |
- Calculate the expected rate of return, , for Stock B ( = 11.90%.) Do not round intermediate calculations. Round your answer to two decimal places.
%
- Calculate the standard deviation of expected returns, A, for Stock A (B = 19.61%.) 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?
- 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.
- 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.
- 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.
- 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.
- 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.
-Select-IIIIIIIVVItem 4
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Assume the risk-free rate is 3.5%. What are the Sharpe ratios for Stocks A and B? Do not round intermediate calculations. Round your answers to four decimal places.
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