A stock will provide a rate of return of either 21% or 32%. A) If both possibili

Question

A stock will provide a rate of return of either 21% or 32%.

A) If both possibilities are equally likely, calculate the stock's expected return and standard deviation. (Do not round intermediate calculations. Enter your answers as a percent rounded to 1 decimal place.)

B) If Treasury bills yield 5.5% and investors believe that the stock offers a satisfactory expected return, what must the market risk of the stock be? (Enter your answer as a whole percent.)

A stock will provide a rate of return of either 21% or 32%.

A) If both possibilities are equally likely, calculate the stock's expected return and standard deviation. (Do not round intermediate calculations. Enter your answers as a percent rounded to 1 decimal place.)

Expected Return _________% Standard deviation _________%

B) If Treasury bills yield 5.5% and investors believe that the stock offers a satisfactory expected return, what must the market risk of the stock be? (Enter your answer as a whole percent.)

Market risk _________%

Explanation / Answer

Solution:

1.

Expected Return

Standard Deviation

2.

The Market risk = Stock Return - Risk free return

Market risk = 26.5 % - 5.5 %

Market risk = 21 %

Possibilities Weights Expected Returns A 0.5 21% 10.50% B 0.5 32% 16.00% Expected Return of stock 26.50%

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