Stock X has an expected return of 10 percent, a beta coefficient of 0.9, and a standard

Question:

Stock X has an expected return of 10 percent, a beta coefficient of 0.9, and a standard deviation of expected returns of 35 percent. Stock Y has an expected return of 12.5 percent, a beta coefficient of 1.2, and a standard deviation of expected returns of 25 percent.

The risk-free rate is 6 percent, and the market risk premium is 5 percent.

a. Calculate each stock's coefficient of variation.

b. Which stock is riskier for diversified investors?

c. Calculate each stock's required rate of return.

d. On the basis of the two stocks' expected and required returns, which stock would be most attractive to a diversified investor?

e. Calculate the required return of a portfolio that has $7,500 invested in Stock X and $2,500 invested in Stock Y.

f. If the market risk premium increased to 6 percent, which of the two stocks would have the largest increase in their required return?

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