Stocks X and Y have the following probability distributions of expected future r
ID: 2824518 • Letter: S
Question
Stocks X and Y have the following probability distributions of expected future returns:
35
Calculate the expected rate of return, rY, for Stock Y (rX = 14.30%.) Round your answer to two decimal places.
%
Calculate the standard deviation of expected returns, ?X, for Stock X (?Y = 16.32%.) Round your answer to two decimal places.
%
Now calculate the coefficient of variation for Stock Y. Round your answer to two decimal places.
Is it possible that most investors might regard Stock Y as being less risky than Stock X?
If Stock Y is more highly correlated with the market than X, then it might have a higher beta than Stock X, and hence be less risky in a portfolio sense.
If Stock Y is more highly correlated with the market than X, then it might have a lower beta than Stock X, and hence be less risky in a portfolio sense.
If Stock Y is more highly correlated with the market than X, then it might have the same beta as Stock X, and hence be just as risky in a portfolio sense.
If Stock Y is less highly correlated with the market than X, then it might have a lower beta than Stock X, and hence be less risky in a portfolio sense.
If Stock Y is less highly correlated with the market than X, then it might have a higher beta than Stock X, and hence be more risky in a portfolio sense.
-Select-IIIIIIIVV
35
Calculate the expected rate of return, rY, for Stock Y (rX = 14.30%.) Round your answer to two decimal places.
%
Calculate the standard deviation of expected returns, ?X, for Stock X (?Y = 16.32%.) Round your answer to two decimal places.
%
Now calculate the coefficient of variation for Stock Y. Round your answer to two decimal places.
Is it possible that most investors might regard Stock Y as being less risky than Stock X?
If Stock Y is more highly correlated with the market than X, then it might have a higher beta than Stock X, and hence be less risky in a portfolio sense.
If Stock Y is more highly correlated with the market than X, then it might have a lower beta than Stock X, and hence be less risky in a portfolio sense.
If Stock Y is more highly correlated with the market than X, then it might have the same beta as Stock X, and hence be just as risky in a portfolio sense.
If Stock Y is less highly correlated with the market than X, then it might have a lower beta than Stock X, and hence be less risky in a portfolio sense.
If Stock Y is less highly correlated with the market than X, then it might have a higher beta than Stock X, and hence be more risky in a portfolio sense.
-Select-IIIIIIIVV
Explanation / Answer
Expected rate of return for Stock Y=(0.1*(-24%)+0.2*0%+0.4*20%+0.2*25%+0.1*35%)=14.1%
Standard Deviation of Stock X=sqrt(0.1*(-6%-14.3%)^2+0.2*(5%-14.3%)^2+0.4*(15%-14.3%)^2+0.2*(22%-14.3%)^2+0.1*(35%-14.3%)^2)=10.65%
COefficient of Variation for Stock Y=Standard Deviation for Y/Expected returns for Y=16.32%/14.1%=1.157
If Stock Y is less highly correlated with the market than X, then it might have a lower beta than Stock X, and hence be less risky in a portfolio sense.