Question
Stocks A and B have the following probability distributions of expected future returns: Probability A B 0.1 (14 %) (28 %) 0.1 4 0 0.5
Stocks A and B have the following probability distributions of expected future returns:
Probability A B
0.1 (14 %) (28 %)
0.1 4 0
0.5 14 24
0.2 24 30
0.1 36 36
- Calculate the expected rate of return, , for Stock B ( = 14.40%.) Do not round intermediate calculations. Round your answer to two decimal places.
- Calculate the standard deviation of expected returns, A, for Stock A (B = 17.96%.) 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 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.
- 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.
D. 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:
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