EXPECTED RETURNS

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

Probability	A	B
0.2	(11%)	(27%)
0.2	3	0
0.3	11	21
0.2	22	27
0.1	40	41

A.Calculate the expected rate of return, r_B, for Stock B (r_A = 10.10%.) Do not round intermediate calculations. Round your answer to two decimal places. %

B.Calculate the standard deviation of expected returns, _A, for Stock A (_B = 22.00%.) Do not round intermediate calculations. Round your answer to two decimal places. %

C. Now calculate the coefficient of variation for Stock B. Round your answer to two decimal places.

Is it possible that most investors might regard Stock B as being less risky than Stock A?

1. 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.
2. 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.
3. 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.
4. 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.
5. 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.