# Question: Stocks R and S have the following probability distributions of

Stocks R and S have the following probability distributions of returns:

a. Calculate the expected return for each stock.

b. Calculate the expected return of a portfolio consisting of 50 percent of each stock.

c. Calculate the standard deviation of returns for each stock and for the portfolio. Which stock is considered riskier with respect to total risk?

d. Compute the coefficient of variation for each stock. According to the coefficient of variation, which stock is considered riskier?

e. If you added more stocks at random to the portfolio, which of the following statements most accurately describes what would happen to σp2?

(1) σp would remain constant.

(2) σp would decline to somewhere in the vicinity of 15 percent.

(3) σp would decline to zero if enough stocks wereincluded.

a. Calculate the expected return for each stock.

b. Calculate the expected return of a portfolio consisting of 50 percent of each stock.

c. Calculate the standard deviation of returns for each stock and for the portfolio. Which stock is considered riskier with respect to total risk?

d. Compute the coefficient of variation for each stock. According to the coefficient of variation, which stock is considered riskier?

e. If you added more stocks at random to the portfolio, which of the following statements most accurately describes what would happen to σp2?

(1) σp would remain constant.

(2) σp would decline to somewhere in the vicinity of 15 percent.

(3) σp would decline to zero if enough stocks wereincluded.

**View Solution:**## Answer to relevant Questions

Terry recently invested equal amounts in five stocks to form an investment portfolio, which has a beta equal to 1.2—that is, βP = 1.2. Terry is considering selling the riskiest stock in the portfolio, which has a beta ...Stock A and Stock B have the following historical returns:a. Calculate the average rate of return for each stock during the period 2011–2015.Assume that someone held a portfolio consisting of 50 percent Stock A and 50 ...Explain why, for a particular firm, the cost of retained earnings, rs, is always less than the cost of new equity, re.A company’s 6 percent coupon rate, semiannual payment, $1,000 par value bond that matures in 30 years sells at a price of $515.16. The company’s marginal tax rate is 40 percent. What is the firm’s component cost of ...The Mason Corporation’s present capital structure, which is also its target capital structure, calls for 50 percent debt and 50 percent common equity. The firm has only one potential project, an expansion program with a ...Post your question