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c. Calculate each stock's required rate of return. Round your answers to two decimal places. rx = X% % Ty = 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 $7,500 invested in Stock X and $10,000 invested in Stock Y. Do not round intern calculations. Round your answer to two decimal places. X% Гр f. If the market risk premium increased to 6%, which of the two stocks would have the larger increase in its required return?

c. Calculate each stock's required rate of return. Round your answers to two decimal places. rx = X% % Ty = 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 $7,500 invested in Stock X and $10,000 invested in Stock Y. Do not round intern calculations. Round your answer to two decimal places. X% Гр f. If the market risk premium increased to 6%, which of the two stocks would have the larger increase in its required return?

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Sections C through F please

Excel Online Structured Activity: Evaluating risk and return Stock X has a 9.5% expected return, a beta coefficient of 0.8, and a 35% standard deviation of expected returns. Stock Y has a 12.5% expected return, a beta coefficient of 1.2, and a 25.0% standard deviation. The risk-free rate is 6%, and the market risk premium is 5%. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below. X Open spreadsheet a. Calculate each stock's coefficient of variation. Round your answers to two decimal places. Do not round intermediate calculations. CVx: = CVy = 3.68 2 b. Which stock is riskier for a diversified investor? I. For diversified investors the relevant risk is measured by beta. Therefore, the stock with the lower beta is more risky. Stock X has the lower beta so it is more risky than Stock Y. II. For diversified investors the relevant risk is measured by standard deviation of expected returns. Therefore, the stock with the lower standard deviation of expected returns is more risky. Stock Y has the lower standard deviation so it is more risky than Stock X. III. For diversified investors the relevant risk is measured by beta. Therefore, the stock with the higher beta is less risky. Stock Y has the higher beta so it is less risky than Stock X. IV. For diversified investors the relevant risk is measured by beta. Therefore, the stock with the higher beta is more risky. Stock Y has the higher beta so it is more risky than Stock X. V. For diversified investors the relevant risk is measured by standard deviation of expected returns. Therefore, the stock with the higher standard deviation of expected returns is more risky. Stock X has the higher standard deviation so it is more risky than Stock Y.
Transcribed Image Text:Excel Online Structured Activity: Evaluating risk and return Stock X has a 9.5% expected return, a beta coefficient of 0.8, and a 35% standard deviation of expected returns. Stock Y has a 12.5% expected return, a beta coefficient of 1.2, and a 25.0% standard deviation. The risk-free rate is 6%, and the market risk premium is 5%. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below. X Open spreadsheet a. Calculate each stock's coefficient of variation. Round your answers to two decimal places. Do not round intermediate calculations. CVx: = CVy = 3.68 2 b. Which stock is riskier for a diversified investor? I. For diversified investors the relevant risk is measured by beta. Therefore, the stock with the lower beta is more risky. Stock X has the lower beta so it is more risky than Stock Y. II. For diversified investors the relevant risk is measured by standard deviation of expected returns. Therefore, the stock with the lower standard deviation of expected returns is more risky. Stock Y has the lower standard deviation so it is more risky than Stock X. III. For diversified investors the relevant risk is measured by beta. Therefore, the stock with the higher beta is less risky. Stock Y has the higher beta so it is less risky than Stock X. IV. For diversified investors the relevant risk is measured by beta. Therefore, the stock with the higher beta is more risky. Stock Y has the higher beta so it is more risky than Stock X. V. For diversified investors the relevant risk is measured by standard deviation of expected returns. Therefore, the stock with the higher standard deviation of expected returns is more risky. Stock X has the higher standard deviation so it is more risky than Stock Y.
c. Calculate each stock's required rate of return. Round your answers to two decimal places. rx = = ry d. On the basis of the two stocks' expected and required returns, which stock would be more attractive to a diversified investor? î = % % e. Calculate the required return of a portfolio that has $7,500 invested in Stock X and $10,000 invested in Stock Y. Do not round intermediate calculations. Round your answer to two decimal places. ŷ % f. If the market risk premium increased to 6%, which of the two stocks would have the larger increase in its required return?
Transcribed Image Text:c. Calculate each stock's required rate of return. Round your answers to two decimal places. rx = = ry d. On the basis of the two stocks' expected and required returns, which stock would be more attractive to a diversified investor? î = % % e. Calculate the required return of a portfolio that has $7,500 invested in Stock X and $10,000 invested in Stock Y. Do not round intermediate calculations. Round your answer to two decimal places. ŷ % f. If the market risk premium increased to 6%, which of the two stocks would have the larger increase in its required return?
Expert Solution
Step 1 Explanation

Coefficient of variation = Standard deviation/Mean

Required rate of return as per CAPM equstion = Risk free rate+Beta*Market risk premium

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