Question
Stocks A and B have the following probability distributions of expected future returns: Probability A B 0.2 (13%) (22%) 0.2 5 0 0.3 11 19
Stocks A and B have the following probability distributions of expected future returns:
Probability | A | B |
0.2 | (13%) | (22%) |
0.2 | 5 | 0 |
0.3 | 11 | 19 |
0.2 | 21 | 30 |
0.1 | 37 | 48 |
Calculate the expected rate of return, rB, for Stock B (rA = 9.60%.) Do not round intermediate calculations. Round your answer to two decimal places. %
Calculate the standard deviation of expected returns, A, for Stock A (B = 21.66%.) 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 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.
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.
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