Problem 8.06( Expected Returns)

B (33%) 0 2. Problem 8.06 (Expected Returns) CE eBook Problem Walk-Through Stocks A and B have the following probability distributions of expected future returns: Probability A 0.1 (5%) 0.2 5 0.4 12 19 0.2 19 27 0.1 36 45 a. Calculate the expected rate of return, FB, for Stock B (FA = 12.70%.) Do not round intermediate calculations. Round your answer to two decimal places % b. Calculate the standard deviation of expected returns, OA, for Stock A (08= 20.00%.) Do not round intermediate calculations. Round your answer to two decimal places. %6 Now calculate the coefficient of variation for Stock B. Do not round intermediate calculations. 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 lower beta than Stock A, and hence be less risky in a portfolio sense. 11. 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 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 lower beta than Stock A, and hence be less risky in a portfolio sense. II. 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. III. If Stock B is mare 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. IV. 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 al portfolio sense. V. 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. -Select-v c. Assume the risk-free rate is 3.5%. What are the Sharpe ratios for Stocks A and B? Do not round intermediate calculations. Round your answers to four decimal places. Stock A: Stock B: Are these calculations consistent with the information obtained from the coefficient of variation calculations in Part b? I. In a stand-alone risk sense A is less risky than B. 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. II. In a stand-alone risk sense A is more risky than 8. If Stock 8 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. III. In a stand-alone risk sense A is more risky than 8. If Stock 8 is less highly correlated with the market than A, then it might have a higher i beta than Stock A, and hence be more risky in a portfolio sense. IV. In a stand-alone risk sense A is less risky than B. If Stock B is more highly correlated with the market than A, then it might have the same -Select v c. Assume the risk-free rate is 3.5%. What are the Sharpe ratios for Stocks A and 87 Do not round intermediate calculations. Round your answers to four decimal places. Stock A: Stock B: Are these calculations consistent with the information obtained from the coefficient of variation calculations in Part b? 1. In a stand-alone risk sense A is less risky than B. 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. II. In a stand-alone risk sense A is more risky than B. 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. III. In a stand-alone risk sense A is more risky than B. 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. IV. In a stand-alone risk sense A is less risky than 8. 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. V. In a stand-alone risk sense A is less risky than B. 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. -Select