A. The expected rate of return for stock A is__? (Two decimal places) The standa

Question

A. The expected rate of return for stock A is__? (Two decimal places)
The standard deviation of stock A is __?
B. The expected rate of return for stock B is __?
The standard deviation for stock B is __?
s People Window Help Take a Test- Patrick Quigley Secure l https://www.mathxl.com/Student/PlayerTest.aspx?testid. 172973966&centervinayes; FINC 300 (01): Fall 2017 Test: Exam 2 Submit Test This Question: 6 pts 2 of 30 (0 complete) This Test: 100 pts possi Question Help * (Expected rate of return and risk) Syntex, Inc. is considering an investment in one of two common stocks. Given the information that follows, which investment is better, based on the risk (as measured by the standard deviation) and return? Common Stock A Common Stock B ProbabilityReturn 0.35 0.30 0.35 Probability 0.15 0.35 0.35 0.15 Return 13% 1796 18% 796 16% 21% a. Given the information in the table, the expected rate of return for stock A is % (Round to two decimal places.) The standard deviation of stock A is %. (Round to two decimal places.) b. The expected rate of return for stock B is %. (Round to two decimal places) The standard deviation for stock B is %. (Round to two decimal places.) c. Based on the risk (as measured by the standard deviation) and return of each stock, which investment is better? (Select the best choice below.) 0 A, Stock A is better because it has a higher expected rate of return with less risk. O B. Stock B is better because it has a lower expected rate of return with more risk. Click to select your answer(s)

Explanation / Answer

Answer to Part A.

Expected Rate of Return of Stock A = (0.35 * 0.13) + (0.30 * 0.17) + (0.35 * 0.18)
Expected Rate of Return of Stock A = 0.0455 + 0.051 + 0.063
Expected Rate of Return of Stock A = 0.1595 or 15.95%

Variance = 0.35 * (0.13 - 0.1595)^2 + 0.30 * (0.17 - 0.1595)^2 + 0.35 * (0.18 - 0.1595)^2
Variance = 0.000485

Standard Deviation = (0.000485)^(1/2)
Standard Deviation = 0.0220 = 2.20%

Answer to Part B.

Expected Rate of Return of Stock B = (0.15 * -0.07) + (0.35 * 0.07) + (0.35 * 0.16) + (0.15 * 0.21)
Expected Rate of Return of Stock B = (0.0105) + 0.0245 + 0.0544 + 0.0315
Expected Rate of Return of Stock B = 0.0999 or 9.99%

Variance = 0.15 * (-0.07 - 0.0999)^2 + 0.35 * (0.07 - 0.0999)^2 + 0.35 * (0.16 - 0.0999)^2 + 0.15 * (0.21 - 0.0999)^2
Variance = 0.007725

Standard Deviation = (0.007725)^(1/2)
Standard Deviation = 0.0879 = 8.79%

Answer to Part C.

Stock A is better than Stock B, as it has higher expected Rate of return with less risk.

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