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

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$11.$ Problem $8\mathrm{.}19($Evaluating Risk and Return$)$

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Problem Walk$-$Through

the market risk premium is $5\%.$

a$.$ Calculate each stock's coefficient of variation. Do not round intermediate calculations. Round your answers to two decimal places.

$C{V}_x=$

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$C{V}_y=$

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b$.$ Which stock is riskier for a diversified investor?

I. For diversified investors the relevant risk is measured by beta. Therefore, the stock with the higher beta is riskier. Stock $Y$ has the higher beta so it is riskier than Stock $x.$ deviation so it is riskier than Stock $Y.$

III. For diversified investors the relevant risk is measured by beta. Therefore, the stock with the lower beta is riskier. Stock $x$ has the lower beta so it is riskier than Stock $Y.$ deviation so it is riskier than Stock $x.$

V$.$ For diversified investors the relevant risk is measured by beta. Therefore, the stock with the higher beta is less risky. Stock $Y$ has the higher beta so it is less risky than Stock $x.$

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c$.$ Calculate each stock's required rate of return. Round your answers to one decimal place.

$r_x=\%$

$r_y=$

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

$-$Select$-$

$r_p=$

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f$.$ If the market risk premium increased to $6\%,$ which of the two stocks would have the larger increase in its required return?

$-$Select$-$

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