EXPECTED RETURNS Stocks A and B have the following probability distributions of expected future returns: Probability 0.1 0.2 0.4 0.2 0.1 A (10%) 2 12 20 38 (35%) 0 20 25 45 a. Calculate the expected rate of return, f, for Stock B (= 12%). A b. Calculate the standard deviation of expected returns, a, for Stock A (a = 20.35%). Now calculate the coefficient of variation for Stock B. Is it possible that most investors will regard Stock B as being less risky than Stock A? Explain. c. Assume the risk-free rate is 2.5%. What are the Sharpe ratios for Stocks A and B? Are these calculations consistent with the information obtained from the coefficient of variation calculations in part b? Explain.
EXPECTED RETURNS Stocks A and B have the following probability distributions of expected future returns: Probability 0.1 0.2 0.4 0.2 0.1 A (10%) 2 12 20 38 (35%) 0 20 25 45 a. Calculate the expected rate of return, f, for Stock B (= 12%). A b. Calculate the standard deviation of expected returns, a, for Stock A (a = 20.35%). Now calculate the coefficient of variation for Stock B. Is it possible that most investors will regard Stock B as being less risky than Stock A? Explain. c. Assume the risk-free rate is 2.5%. What are the Sharpe ratios for Stocks A and B? Are these calculations consistent with the information obtained from the coefficient of variation calculations in part b? Explain.
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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![EXPECTED RETURNS Stocks A and B have the following probability distributions of
expected future returns:
Probability
0.1
0.2
0.4
0.2
0.1
A
(10%)
2
12
20
38
B
(35%)
0
20
25
45
a. Calculate the expected rate of return, f, for Stock B (₁ = 12%).
b. Calculate the standard deviation of expected returns, σ, for Stock A ( = 20.35%).
Now calculate the coefficient of variation for Stock B. Is it possible that most investors
will regard Stock B as being less risky than Stock A? Explain.
c. Assume the risk-free rate is 2.5%. What are the Sharpe ratios for Stocks A and B? Are
these calculations consistent with the information obtained from the coefficient of
variation calculations in part b? Explain.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F00828718-2df8-4d22-87de-a2e53e10f924%2F7132a052-820e-4fd4-baf8-a741cf8bab2e%2F7dq6g6r_processed.png&w=3840&q=75)
Transcribed Image Text:EXPECTED RETURNS Stocks A and B have the following probability distributions of
expected future returns:
Probability
0.1
0.2
0.4
0.2
0.1
A
(10%)
2
12
20
38
B
(35%)
0
20
25
45
a. Calculate the expected rate of return, f, for Stock B (₁ = 12%).
b. Calculate the standard deviation of expected returns, σ, for Stock A ( = 20.35%).
Now calculate the coefficient of variation for Stock B. Is it possible that most investors
will regard Stock B as being less risky than Stock A? Explain.
c. Assume the risk-free rate is 2.5%. What are the Sharpe ratios for Stocks A and B? Are
these calculations consistent with the information obtained from the coefficient of
variation calculations in part b? Explain.
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