Question: Consider the following two probability distributions of expected future returns for stocks A and B: Probability Return Stock A Stock B (%) (%) 0.1 -7.5%

Consider the following two probability distributions of expected future returns for stocks A and B:

Probability

Return

Stock A

Stock B

(%)

(%)

0.1 -7.5% -26.25%
0.2 1.5 0
0.4 9 15
0.2 15 18.75
0.1 28.5 33.75

Suppose you know that the expected rate of return for stock A is 9% and would like to calculate the expected return for stock B.

The expected rate of return for stock B is approximately ________ %.

Suppose you know that the standard deviation of expected returns for stock B is 15.2602% and would like to calculate the standard deviation of expected returns for stock A.

Hint: Recall that the expected rate of return for stock A is 9%.

The variance of the expected returns for stock A is approximately ____% while the standard deviation of expected returns for stock A is approximately _____ %.

Using your calculations in the previous parts of the problem, the coefficient of variation of stock B is approximately ____ .

True or False: Investors will always view the stock with a lower coefficient of variation as a safer choice when compared to a stock with a higher coefficient of variation.

True

False

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer
Step: 1 Unlock blur-text-image
Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock
Step: 3 Unlock

Students Have Also Explored These Related Finance Questions!