Expected Rate of Return for Stock Assignment | Homework For You

Stocks A and B have the following probability distributions of expected future returns:

Probability     A     B
0.1 (7 %) (22 %)
0.2 5 0
0.5 14 19
0.1 22 27
0.1 30 36

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  1. Calculate the expected rate of return, for Stock B ( = 12.50%.) Do not round intermediate calculations. Round your answer to two decimal places.  %
  2. Calculate the standard deviation of expected returns, σA, for Stock A (σB = 15.70%.) 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?

    1. 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.
    2. 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.
    3. 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.
    4. 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.
    5. 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.

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  3. Assume the risk-free rate is 1.5%. 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:

    Are these calculations consistent with the information obtained from the coefficient of variation calculations in Part b?

    1. In a stand-alone risk sense A is more risky than B. 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.
    2. In a stand-alone risk sense A is less risky than B. 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.
    3. In a stand-alone risk sense A is less risky than B. 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.
    4. In a stand-alone risk sense A is less risky than B. 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.
    5. In a stand-alone risk sense A is more risky than B. 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. Get Finance homework help today