Problem 8-6 Expected returns

1) Stocks X and Y have the following probability distributions of expected future returns:

Probability	X	Y
0.2	-9%	-30%
0.2	6	0
0.3	12	23
0.2	24	27
0.1	36	41

a) Calculate the expected rate of return, rY, for Stock Y (rX = 11.40%.) Round your answer to two decimal places. %

b) Calculate the standard deviation of expected returns, X, for Stock X (Y = 23.33%.) Round your answer to two decimal places. %

c) Now calculate the coefficient of variation for Stock Y. Round your answer to two decimal places.

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2) Is it possible that most investors might regard Stock Y as being less risky than Stock X?

A) If Stock Y is less highly correlated with the market than X, then it might have a higher beta than Stock X, and hence be more risky in a portfolio sense.

B) If Stock Y is more highly correlated with the market than X, then it might have a higher beta than Stock X, and hence be less risky in a portfolio sense.

C) If Stock Y is more highly correlated with the market than X, then it might have a lower beta than Stock X, and hence be less risky in a portfolio sense.

D) If Stock Y is more highly correlated with the market than X, then it might have the same beta as Stock X, and hence be just as risky in a portfolio sense.

E) If Stock Y is less highly correlated with the market than X, then it might have a lower beta than Stock X, and hence be less risky in a portfolio sense.