Ch $08-$ End$-$of$-$Chapter Problems $-$ Risk and Rates of Return

Stocks A and $B$ have the following probability distributions of expected future returns:

a$.$ Calculate the expected rate of return, hat$(r{)}_B,$ for Stock B $($ hat$(r{)}_A=12\mathrm{.}10\%.)$ Do not round intermediate calculations. Round your answer to two decimal places.

$\%$

b$.$ Calculate the standard deviation of expected returns, ${}_A,$ for Stock $.)$ 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 $A?$

I. 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.

II$.$ 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.

III. 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.

IV$.$ 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.

V$.$ 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.

c$.$ Assume the risk$-$free rate is $3\mathrm{.}5\%.$ 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:

Are these calculations consistent with the information obtained from the coefficient of variation calculations in Part $b?$

portfolio sense.

portfolio sense.

portfolio sense.