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Stocks A and B have the following probability distributions of expected future returns: Probability A B 0.1 (11 %) (38 %) 0.2 5 0 0.5

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

Probability A B
0.1 (11 %) (38 %)
0.2 5 0
0.5 13 21
0.1 18 26
0.1 31 36
  1. Calculate the expected rate of return, , for Stock B ( = 11.30%.) Do not round intermediate calculations. Round your answer to two decimal places.

    %

  2. Calculate the standard deviation of expected returns, A, for Stock A (B = 19.89%.) 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 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.

  3. 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.

    Stock A:

    Stock B:

    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 lower beta than Stock A, and hence be less risky in a portfolio sense.
    2. 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.
    3. 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.
    4. 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.
    5. 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.

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