ving probadiny Probability A 0.1 (15%) (31%) 0.1 5 0 0.6 15 18 0.1 22 0.1 31 30 49 a. Calculate the expected rate of return, B, for Stock B (A = 13.30 %. ) Do not round intermediate calculations. Round your answer to two decimal places. % b. Calculate the standard deviation of expected returns, GA, for Stock A (as 19.42%.) 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? I. 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. II. 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. III. 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. IV. 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. V. 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. -Select- c. Assume the risk-free rate is 3.5%. What are the Sharpe ratios for Stocks A and B? Do not round intermediate calculations. Round your answers to four decimal places.
ving probadiny Probability A 0.1 (15%) (31%) 0.1 5 0 0.6 15 18 0.1 22 0.1 31 30 49 a. Calculate the expected rate of return, B, for Stock B (A = 13.30 %. ) Do not round intermediate calculations. Round your answer to two decimal places. % b. Calculate the standard deviation of expected returns, GA, for Stock A (as 19.42%.) 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? I. 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. II. 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. III. 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. IV. 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. V. 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. -Select- c. Assume the risk-free rate is 3.5%. What are the Sharpe ratios for Stocks A and B? Do not round intermediate calculations. Round your answers to four decimal places.
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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Transcribed Image Text:Stocks A and B have the following probability distributions of expected future returns:
Probability
0.1
(15%)
(31%)
0.1
5
0
0.6
15
18
0.1
0.1
22
31
30
49
a. Calculate the expected rate of return, B, for Stock B (A = 13.30%.) Do not round intermediate calculations. Round your answer to two decimal places.
%
b. Calculate the standard deviation of expected returns, GA, for Stock A (σ = 19.42%.) 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?
I. 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.
II. 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.
III. 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.
IV. 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.
V. 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.
-Select-
c. Assume the risk-free rate is 3.5%. 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?
I. 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.
II. 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.
III. 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.
IV. 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.
V. 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.
-Select- v
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