Stocks A and B have the following probability distributions of expected future returns Probability A B 0 1 (7 ) (40 ) 0 2 2 0 0 3 11 18 0 2 22 27 0 2 39 48 Calculate the expected rate of return, r B , for Stock B (r A 15 20 ) Do not round intermediate calculations Round your answer to two decimal places Calculate the standard deviation of expected returns, A , for Stock A ( B 24 39 ) Do not round intermediate calculations Round your answer to two decimal places Now calculate the coefficient of variation for Stock B 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 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 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

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Posted on Jul 30, 2024

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

Calculate the expected rate of return, r_B, for Stock B (r_A = 15.20%.) Do not round intermediate calculations. Round your answer to two decimal places. %
Calculate the standard deviation of expected returns, _A, for Stock A (_B = 24.39%.) Do not round intermediate calculations. Round your answer to two decimal places. %
Now calculate the coefficient of variation for Stock B. 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 the same beta as Stock A, and hence be just as risky in a portfolio sense.
2. 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.
3. 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.
4. 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.
5. 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.