EXPECTED RETURNS Stocks A and B have the following probability distributions of

ID: 2784976 • Letter: E

Question

EXPECTED RETURNS

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

1. Calculate the expected rate of return, rB, for Stock B (rA = 11.40%.) Do not round intermediate calculations. Round your answer to two decimal places.
%

2. Calculate the standard deviation of expected returns, A, for Stock A (B = 20.84%.) Do not round intermediate calculations. Round your answer to two decimal places.
%

3. Now calculate the coefficient of variation for Stock B. Round your answer to two decimal places.

Is it possible that most investors might regard Stock B as being less risky than Stock A? pick one from below.

a. 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.

b. 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.

c. 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.

d. 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.

f. 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.

EXPECTED RETURNS

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

Probability A B 0.2 (9%) (23%) 0.2 3 0 0.3 16 20 0.2 24 25 0.1 30 45