Reference no: EM131971959
Question: Expected returns
Stocks A and B have the following probability distributions of expected future returns:
| Probability |
A |
B |
| 0.1 |
-9% |
-37% |
| 0.3 |
5 |
0 |
| 0.3 |
13 |
20 |
| 0.2 |
20 |
30 |
| 0.1 |
39 |
39 |
Calculate the expected rate of return, rB, for Stock B (rA = 12.40%.) Do not round intermediate calculations. Round your answer to two decimal places. %
Calculate the standard deviation of expected returns, sA, for Stock A (sB = 20.98%.) 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?
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.
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