Besides, Stock A has a beta of 0.8 and stock B has a beta of 1.7 A. What are the
ID: 2623871 • Letter: B
Question
Besides, Stock A has a beta of 0.8 and stock B has a beta of 1.7
A. What are the expected rates of return for stocks A and B?
B. What are the standard deviations for A and B
C. What are the coefficients of variation for A and B? Which stock is more risky? Why?
D. If you equally invest your money in A and B to form a portfolio, what would be your portfolio's expected rate of return? What would be your portfolio's beta?
State Probability A Return B Return Boom .20 18% -7% Normal .50 10% 6% Bust .30 5% 12%Explanation / Answer
State Probability A Return prob* return (return - expected return)^2 prob *(return - expected return)^2 B Return prob* return (return - expected return)^2 prob *(return - expected return)^2 Boom 0.2 0.18 3.60% 0.0062 0.001248 -7% -1.40% 0.0149 0.002977 Normal 0.5 0.1 5.00% 0.0000 0.000001 6% 3.00% 0.0001 0.000032 Bust 0.3 0.05 1.50% 0.0026 0.000780 12% 3.60% 0.0046 0.001387 Total 10.10% 0.002029 5.20% 0.004396 A) EXPECTED RETURN STOCK A 10.10% STOCK B 5.20% B) Standard Devaition STOCK A 4.50% STOCK B 6.63% c) Coeficient of variation STOCK A 0.4455 STOCK B 1.275 Security b is riskier than security a as it has a larger cv d) Portfolio return 7.65% Portfolio Beta 1.25
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