Problem 13-10 (Algo) Risk-averse [LO13-2] Tim Trepid is highly risk-averse while Mike Macho actually enjoys taking a risk. Returns: Expected Value $ 8,800 7,000 16,900 11,600 Investments Buy stocks Buy bonds Buy commodity futures Buy options a-1. Compute the coefficients of variation. Note: Round your answers to 3 decimal places. Buy stocks Buy bonds Buy commodity futures Buy options Coefficient of Variation Standard Deviation $ 5,600 2,060 22,100 12,400

5. Changes to the security market line The following graph plots the current security market line (SML) and indicates the return that investors require from holding stock from Happy Corp. (HC). Based on the graph, complete the table that follows: 20.0 REQUIRED RATE OF RETURN (Percent) 6 18.0 12.0 60 0.5 1.0 RISK (Beta) Retum on HC's Stock 20

8 Consider the following information on Stocks I and II: State of Economy Recession Normal Irrational exuberance a. Beta Standard deviation Probability of State of Economy .28 .63 .09 b. Beta The market risk premium is 11.3 percent, and the risk-free rate is 4.3 percent. a. Calculate the beta and standard deviation of Stock I. Note: Do not round intermediate calculations. Enter the standard deviation as a percent and round both answers to 2 decimal places, e.g., 32.16. b. Calculate the beta and standard deviation of Stock II. Note: Do not round intermediate calculations. Enter the standard deviation as a percent and round both answers to 2 decimal places, e.g., 32.16. c. Which stock has the most systematic risk? d. Which one has the most unsystematic risk? e. Which stock is "riskier"? Rate of Return if State Occurs Stock I Stock II Standard deviation c. Most systematic risk d. Most unsystematic risk e. "Riskier" stock .035 .335 .195 % -.23 .15 .43 %

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