Stocks A and B have the following probability distributions of expected future returns:Probability A B0.1(7%)(26%)0.13 0 0.514 22 0.220 26 0.136 50 Calculate the expected rate of return, , for Stock B ( = 14.20%.) Do not round intermediate calculations. Round your answer to two decimal places. %Calculate the standard deviation of expected returns, σA, for Stock A (σB = 18.68%.) Do not round intermediate calculations. Round your answer to two decimal places. %Now calculate the coefficient of variation for Stock B. Do not round intermediate calculations. 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. Assume the risk-free rate is 2.5%. What are the Sharpe ratios for Stocks A and B? Do not round intermediate calculations. Round your answers to four decimal places.Stock A: Stock B: Are these calculations consistent with the information obtained from the coefficient of variation calculations in Part b? In a stand-alone risk sense A is more risky than B. 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.In a stand-alone risk sense A is less risky than B. 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.In a stand-alone risk sense A is less risky than B. 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.In a stand-alone risk sense A is less risky than B. 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.In a stand-alone risk sense A is more risky than B. 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.

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Answered: Stocks A and B have the following…

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

Probability	A	B
0.1	(7	%)	(26	%)
0.1	3		0
0.5	14		22
0.2	20		26
0.1	36		50

Calculate the expected rate of return, , for Stock B ( = 14.20%.) Do not round intermediate calculations. Round your answer to two decimal places.
%
Calculate the standard deviation of expected returns, σ_A, for Stock A (σ_B = 18.68%.) Do not round intermediate calculations. Round your answer to two decimal places.
%

Now calculate the coefficient of variation for Stock B. Do not round intermediate calculations. Round your answer to two decimal places.

Is it possible that most investors might regard Stock B as being less risky than Stock A?
1. 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.
2. 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.
3. 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.
4. 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.
5. 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.
Assume the risk-free rate is 2.5%. What are the Sharpe ratios for Stocks A and B? Do not round intermediate calculations. Round your answers to four decimal places.

Stock A:

Stock B:

Are these calculations consistent with the information obtained from the coefficient of variation calculations in Part b?
1. In a stand-alone risk sense A is more risky than B. 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.
2. In a stand-alone risk sense A is less risky than B. 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.
3. In a stand-alone risk sense A is less risky than B. 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.
4. In a stand-alone risk sense A is less risky than B. 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.
5. In a stand-alone risk sense A is more risky than B. 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.

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