Chapter 8 8.6 EXPECTED RETURNS Stocks A and B have the following probability distributions of expected future retum Probability A B 0.1 -10% -35% 0.2 2 0 0.4 12 20 0.2 30 2 25 0.1 38 45 a Calculate the expected rate of return, re for Stock B (rA = 12%). b. Calculate the standard deviation of expected returns, OA for Stock A (os = 20.35%). Now calculate the coefficient of variation for Stock B. Is it possible that most investors will regard Stock B as being less risky than Stock A? Explain. c. Assume the risk-free rate is 2.5%. What are the Sharpe ratios for Stocks A and B? Are these calculations consistent with the information obtained from the coefficient of variation calculations in part b? Explain