Problem: Stocks x and y have the following probabiltiy distributionsof expected future returns:
Probability x y
0.1 (10%) (35%)
0.2 2 0
0.4 12 20
0.2 20 25
0.1 38 45
Q1. Calculate the expected rate of return r^y1 for stock Y (r^x = 12%)
Q2. Calculate the standard devaiation of expected returns ax for stock x (ay = 20.35%)
Now calculate the coefficient of variation for stock y. Is it possible that most investors might regard stock y as being less risky than stock x? (explain)