# Expected Rate of Return for Stock Assignment | Homework For You

May 22nd, 2020

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

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Probability |
A |
B |
||

0.1 | (12 | %) | (31 | %) |

0.1 | 5 | 0 | ||

0.6 | 11 | 22 | ||

0.1 | 18 | 25 | ||

0.1 | 37 | 48 |

- Calculate the expected rate of return, , for Stock B ( = 11.40%.) Do not round intermediate calculations. Round your answer to two decimal places. %
- Calculate the standard deviation of expected returns, σ
_{A}, for Stock A (σ_{B}= 19.41%.) Do not round intermediate calculations. Round your answer to two decimal places. %Now calculate the coefficient of variation for Stock B. Do not round intermediate calculations. Round your answer to two decimal places.

Is it possible that most investors might regard Stock B as being less risky than Stock 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.
- 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.
- 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.
- 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.
- 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.

-Select-IIIIIIIVVItem 4

- Assume the risk-free rate is 1.5%. What are the Sharpe ratios for Stocks A and B? Do not round intermediate calculations. Round your answers to four decimal places.
Stock A:

Stock B:

Are these calculations consistent with the information obtained from the coefficient of variation calculations in Part b?

- In a stand-alone risk sense A is more risky than B. 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.
- In a stand-alone risk sense A is less risky than B. 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.
- In a stand-alone risk sense A is less risky than B. 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.
- In a stand-alone risk sense A is less risky than B. 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.
- In a stand-alone risk sense A is more risky than B. 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.Get Finance homework help today