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12 Jan 2019

You must add one of two investments to an already well- diversified portfolio.

Security A Security B
Expected Return = 14% Expected Return = 12%
Standard Deviation of Standard Deviation of
Returns = 15.0% Returns = 11%
Beta = 1.5 Beta = 1.5

If you are a risk-averse investor, which one is the better choice?

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Jamar FerryLv2

14 Jan 2019

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1. Security C has an expected return of 6% and a standard deviation of 3% while security D has an expected return of 10% and a standard deviation of 7%. The correlation of returns between the two securities is â1.

a) If you place half of the money in each stock, then what is the expected return of this portfolio?

b) If you place 20% of the money in stock C and the remaining in stock D, then what is the expected return of the portfolio?

c) What is the portfolio standard deviation in b above?

2. a) A security has a beta of 1.5 when the risk-free rate is 2.6 percent and the expected return on the market is 12 percent. Calculate the expected return on the security.

b) If the beta on the security in a) increases to 2.5, what is the new expected return? Why does the expected return increase as the beta increases?

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burgundygnu766

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

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