1- Expected returns Stocks A and B have the following probability distributions of expected future returns:
Probability A B
0.1 -11% -33%
0.3 5 0
0.3 11 20
0.2 23 30
0.1 37 46
Calculate the expected rate of return, rB, for Stock B (rA = 12.00%.) Do not round intermediate calculations. Round your answer to two decimal places. ?%
Calculate the standard deviation of expected returns, σA, for Stock A (σB = 21.06%.) 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?
I. 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.
II. 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.
III. 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.
IV. 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.
V. 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- Required rate of return Stock R has a beta of 2.1, Stock S has a beta of 0.5, the required return on an average stock is 10%, and the risk-free rate of return is 3%. By how much does the required return on the riskier stock exceed the required return on the less risky stock? Round your answer to two decimal places. ?%