Evaluating risk and return. Stock X has an expected return of 9.5 percent, a beta coefficient of 0.9, and a 30 percent standard deviation of expected returns. Stock Y has a 13 percent expected return, a beta coefficient of 1.3, and a 20 percent standard deviation. The risk-free rate is 5 percent, and the market risk premium is 5.5 percent.

a) Calculate the coefficient of variation of each stock.

b) Which stock is riskier for diversified investors? Which stock is riskier for undiversified investors?

c) Use the CAPM model to calculate each stocks required rate of return.

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

e) Calculate the required return of a portfolio that has $7,000 invested in Stock X and $3,000 invested in Stock Y.

f) If the market risk premium increased to 6.5 percent, which of the two stocks would have the larger increase in its required return? Why would the market risk premium increase?