EBK CFIN
6th Edition
ISBN: 9781337671743
Author: BESLEY
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Chapter 8, Problem 4PROB
Summary Introduction
Expected
Standard deviation is the financial measure of risk and stability on the
Coefficient of variance is a measure used to calculate the total risk per unit of return of an investment.
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Calculate the coefficients of variation for the following stocks:
Stock
Expected return
Standard deviation of return
1
0.065
0.25
2
0.06
0.17
3
0.14
0.24
What is the coefficient of variation for stock 1?
What is the coefficient of variation for stock 2?
What is the coefficient of variation for stock 3?
f you want to get the best risk-to-reward trade-off, which stock should you buy?
Stock 2
Stock 3
Stock 1
Questions:
a. Compute the expected return for stock X and for stock Y
b. Compute the standard deviation for stock X and for stock Y.
c. Determine the best course to take for investing.
The additional return over the risk-free rate needed to compensate investors for assuming an
average amount of risk.
a.
Market Risk Premium
b.
Risk-free rate
С.
Stock's beta
O d.
Security Market Line
e.
Required Return on Stock
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- The covariance between stocks A and B is 0.0014, standard deviation of stock A is 0.032, and standard deviation of stock B is 0.044. Which of the following is the most appropriate to depict the risk-return characteristics of a portfolio consisting of only stocks A and B, and explain why? E(R) E(R) E(R) В В A A А (A) (B) (C)arrow_forwardK (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 Probability 0.20 0.60 0.20 Common Stock B Return 13% 17% 18% Probability 0.10 0.40 0.40 0.10 (Click on the icon in order to copy its contents into a spreadsheet.) Return -7% 5% 16% 21% www a. Given the information in the table, the expected rate of return for stock A is 16.40 %. (Round to two decimal places.) The standard deviation of stock A is 1.74 %. (Round to two decimal places.) b. The expected rate of return for stock B is 9.8 %. (Round to two decimal places.) The standard deviation for stock B is 6.12 %. (Round to two decimal places.)arrow_forwardSuppose that there are many stocks in the security market and that the characteristics of stocks A and B are given as follows: Stock A B Expected Return 11% 17 Correlation -1 Risk-free rate Standard Deviation 6% 9 Suppose that it is possible to borrow at the risk-free rate, r. What must be the value of the risk-free rate? (Hint: Think about constructing a risk-free portfolio from stocks A and B.) (Do not round intermediate calculations. Round your answer to 3 decimal places.) %arrow_forward
- Suppose that there are many stocks in the security market and that the characteristics of stocks A and B are given as follows: Expected Return 11% 17 Correlation = -1 Stock A B Standard Deviation 6% 9 Suppose that it is possible to borrow at the risk-free rate, rf. What must be the value of the risk-free rate? (Hint: Think about constructing a risk-free portfolio from stocks A and B.) Note: Do not round intermediate calculations. Round your answer to 3 decimal places. Risk-free ratearrow_forwardSuppose that there are many stocks in the security market and that the characteristics of stocks A and B are given as follows: Stock A B Expected Return 9% 19 Correlation = -1 Standard Deviation 5% 12 Suppose that it is possible to borrow at the risk-free rate, rf. What must be the value of the risk-free rate? (Hint: Think about constructing a risk-free portfolio from stocks A and B.) (Do not round intermediate calculations. Round your answer to 3 decimal places.) Risk-free rate %arrow_forwardConsider the following stocks with equal probabilities of return: Outcome | Return (Stock A) | Return (Stock B) 1 -5% 2% 2 10% 12% 3 18% 15% Compute the expected returns of stock A and B. Compute the total risk and relative risk of stock A and B. Which stock is risky? Ignoring the probabilities, what is the total risk and relative risk of stock A and B? Which stock is risky? Round-off final answers only to two decimal places.arrow_forward
- b) The covariance between stocks A and B is 0.0014, standard deviation of stock A is 0.032, and standard deviation of stock B is 0.044. Which of the following is the most appropriate to depict the risk-return characteristics of a portfolio consisting of only stocks A and B, and explain why? E(R) E(R) E(R) B. B. A. A (A) (В) (C)arrow_forwardAn investor is considering to buy one of the following stocks: Stock Expected rate of return Risk W 15% 3.0% X 20% 5.0% Y 18% 3.6% Which stock he should buy? Select one: O a. Stock W or stock Y, both are indifference. O b. Stock W O c. Stock X O d. Stock Yarrow_forwardSuppose that there are many stocks in the security market and that the characteristics of stocks A and B are given as follows: Stock Expected Return Standard Deviation A 11 % 7 % B 17 11 Correlation = –1 Suppose that it is possible to borrow at the risk-free rate, rf. What must be the value of the risk-free rate? (Hint: Think about constructing a risk-free portfolio from stocks A and B.) (Do not round intermediate calculations. Round your answer to 3 decimal places.)arrow_forward
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