Problem 8-6 Expected returns

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

Probability	A	B
0.1	-5%	-39%
0.2	3	0
0.4	16	24
0.2	22	28
0.1	29	38

Calculate the expected rate of return, rB, for Stock B (rA = 13.80%.) Do not round intermediate calculations. Round your answer to two decimal places. %

Calculate the standard deviation of expected returns, A, for Stock A (B = 21.35%.) Do not round intermediate calculations. Round your answer to two decimal places. %

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?

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.

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.

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.

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.

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.