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Stocks X and Y have the following probability distributions of expected future returns:

Probability X Y
0.1 -15% -25%
0.2 6 0
0.3 10 24
0.3 20 27
0.1 33 40

Calculate the expected rate of return, rY, for Stock Y (rX = 12.00%.) Round your answer to two decimal places.
%

Calculate the standard deviation of expected returns, σX, for Stock X (σY = 18.21%.) 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?

A. 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.

B. 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.

C. 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.

D. 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.

E. 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.

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Sixta Kovacek
Sixta KovacekLv2
10 Aug 2018

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Evaluating risk and return

Stock X has a 9.5% expected return, a beta coefficient of 0.8, and a 40% standard deviation of expected returns. Stock Y has a 12.5% expected return, a beta coefficient of 1.2, and a 25.0% standard deviation. The risk-free rate is 6%, and the market risk premium is 5%.

Calculate each stock's coefficient of variation. Round your answers to two decimal places. Do not round intermediate calculations.
CVx =
CVy =

Which stock is riskier for a diversified investor?

For diversified investors the relevant risk is measured by beta. Therefore, the stock with the higher beta is more risky. Stock Y has the higher beta so it is more risky than Stock X.

For diversified investors the relevant risk is measured by standard deviation of expected returns. Therefore, the stock with the higher standard deviation of expected returns is more risky. Stock X has the higher standard deviation so it is more risky than Stock Y.

For diversified investors the relevant risk is measured by beta. Therefore, the stock with the lower beta is more risky. Stock X has the lower beta so it is more risky than Stock Y.

For diversified investors the relevant risk is measured by standard deviation of expected returns. Therefore, the stock with the lower standard deviation of expected returns is more risky. Stock Y has the lower standard deviation so it is more risky than Stock X.

For diversified investors the relevant risk is measured by beta. Therefore, the stock with the higher beta is less risky. Stock Y has the higher beta so it is less risky than Stock X.


-Select-IIIIIIIVVItem 3

Calculate each stock's required rate of return. Round your answers to two decimal places.
rx = %
ry = %

On the basis of the two stocks' expected and required returns, which stock would be more attractive to a diversified investor?
-Select-Stock XStock YItem 6

Calculate the required return of a portfolio that has $4,500 invested in Stock X and $9,000 invested in Stock Y. Do not round intermediate calculations. Round your answer to two decimal places.
rp = %

If the market risk premium increased to 6%, which of the two stocks would have the larger increase in its required return?
-Select-Stock XStock Y

Evaluating risk and return Stock X has a 10.5% expected return, a beta coefficient of 1.0, and a 35% standard deviation of expected returns. Stock Y has a 13.0% expected return, a beta coefficient of 1.3, and a 20.0% standard deviation. The risk-free rate is 6%, and the market risk premium is 5%.

a. Calculate each stock's coefficient of variation. Round your answers to two decimal places. Do not round intermediate calculations.

CVx =

CVy =

b. Which stock is riskier for a diversified investor?

I.For diversified investors the relevant risk is measured by beta. Therefore, the stock with the higher beta is less risky. Stock Y has the higher beta so it is less risky than Stock X.

II.For diversified investors the relevant risk is measured by beta. Therefore, the stock with the higher beta is more risky. Stock Y has the higher beta so it is more risky than Stock X.

III.For diversified investors the relevant risk is measured by standard deviation of expected returns. Therefore, the stock with the higher standard deviation of expected returns is more risky. Stock X has the higher standard deviation so it is more risky than Stock Y.

IV.For diversified investors the relevant risk is measured by beta. Therefore, the stock with the lower beta is more risky. Stock X has the lower beta so it is more risky than Stock Y.

V.For diversified investors the relevant risk is measured by standard deviation of expected returns. Therefore, the stock with the lower standard deviation of expected returns is more risky. Stock Y has the lower standard deviation so it is more risky than Stock X.

Select correct answer

c. Calculate each stock's required rate of return. Round your answers to two decimal places. rx = % ry = %

d.On the basis of the two stocks' expected and required returns, which stock would be more attractive to a diversified investor? -Select-Stock XStock Y

e.Calculate the required return of a portfolio that has $6,500 invested in Stock X and $7,500 invested in Stock Y. Do not round intermediate calculations. Round your answer to two decimal places. rp = %

f. If the market risk premium increased to 6%, which of the two stocks would have the larger increase in its required return?

-Select-Stock X or Stock Y

Evaluating risk and return

Stock X has a 10.0% expected return, a beta coefficient of 0.9, and a 35% standard deviation of expected returns. Stock Y has a 12.0% expected return, a beta coefficient of 1.1, and a 30.0% standard deviation. The risk-free rate is 6%, and the market risk premium is 5%.

Calculate each stock's coefficient of variation. Round your answers to two decimal places. Do not round intermediate calculations.
CVx =
CVy =

Which stock is riskier for a diversified investor?

For diversified investors the relevant risk is measured by beta. Therefore, the stock with the higher beta is more risky. Stock Y has the higher beta so it is more risky than Stock X.

For diversified investors the relevant risk is measured by standard deviation of expected returns. Therefore, the stock with the higher standard deviation of expected returns is more risky. Stock X has the higher standard deviation so it is more risky than Stock Y.

For diversified investors the relevant risk is measured by beta. Therefore, the stock with the lower beta is more risky. Stock X has the lower beta so it is more risky than Stock Y.

For diversified investors the relevant risk is measured by standard deviation of expected returns. Therefore, the stock with the lower standard deviation of expected returns is more risky. Stock Y has the lower standard deviation so it is more risky than Stock X.

For diversified investors the relevant risk is measured by beta. Therefore, the stock with the higher beta is less risky. Stock Y has the higher beta so it is less risky than Stock X.


-Select-IIIIIIIVVItem 3

Calculate each stock's required rate of return. Round your answers to two decimal places.
rx = %
ry = %

On the basis of the two stocks' expected and required returns, which stock would be more attractive to a diversified investor?
-Select-Stock XStock YItem 6

Calculate the required return of a portfolio that has $10,000 invested in Stock X and $5,000 invested in Stock Y. Do not round intermediate calculations. Round your answer to two decimal places.
rp = %

If the market risk premium increased to 6%, which of the two stocks would have the larger increase in its required return?
-Select-Stock X or Stock Y?

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