Stock X and Stock Y has following distribution: Stock X: expected return of 10%, a beta coefficient of 0.9, and a 35% standard deviation of expected return. Stock Y: expected return of 12.5%, a beta coefficient of 1.2, and a 25% standard deviation. The risk free rate is 6%, and the market risk premium is 5%. (iv) On the basis of the two stocks’ expected and required returns, which stock will be more attractive to a diversified investor? (v) Calculate the required rate of return of a portfolio that has RM 7500 invested in stock X and RM2500 invested in stock Y. (vi) If the market risk premium increased to 6%, which of the two stocks would have larger increase in its required return?
Stock X and Stock Y has following distribution:
Stock X: expected return of 10%, a beta coefficient of 0.9, and a 35% standard deviation of expected return.
Stock Y: expected return of 12.5%, a beta coefficient of 1.2, and a 25% standard deviation. The risk free rate is 6%, and the market risk premium is 5%.
(iv) On the basis of the two stocks’ expected and required returns, which stock will be more attractive to a diversified investor?
(v) Calculate the required
(vi) If the market risk premium increased to 6%, which of the two stocks would have larger increase in its required return?
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