Stocks A and B have the following probability distributions of expected future returns: profitability A B 0.1 11% 27% 0.2 3 0 0.4 12 20 0.2 24 28 0.1 36 43 Calculate the expected rate of return, , for Stock B ( = 12.70%.) Do not round intermediate calculations. Round your answer to two decimal places.   % Calculate the standard deviation of expected returns, σA, for Stock A (σB = 18.54%.) 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 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. 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.   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:

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Stocks A and B have the following probability distributions of expected future returns:

profitability A B
0.1 11% 27%
0.2 3 0
0.4 12 20
0.2 24 28
0.1 36 43
  1. Calculate the expected rate of return, , for Stock B ( = 12.70%.) Do not round intermediate calculations. Round your answer to two decimal places.

      %

  2. Calculate the standard deviation of expected returns, σA, for Stock A (σB = 18.54%.) 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?

    1. 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.
    2. 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.
    3. 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.
    4. 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.
    5. 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.

     

  3. 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:  

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