EVALUATING RISK AND RETURN Stock X has a 10.5% expected return, a beta coefficient of 1.0, and a 30% standard deviation of expected returns. Stock Y…
EVALUATING RISK AND RETURN
Stock X has a 10.5% expected return, a beta coefficient of 1.0, and a 30% standard deviation of expected returns. Stock Y has a 13.0% expected return, a beta coefficient of 1.3, and a 20.0% standard deviation. The risk-free rate is 6%, and the market risk premium is 5%.
- Calculate each stock’s coefficient of variation. Round your answers to two decimal places. Do not round intermediate calculations.
CVx =
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Which stock is riskier for a diversified investor?
- 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.
- 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.
- 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.
- 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.
- 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.
Calculate each stock’s required rate of return. Round your answers to two decimal places.
rx =
ry =
On the basis of the two stocks’ expected and required returns, which stock would be more attractive to a diversified investor?
A.) Stock X
B.) Stock Y
Calculate the required return of a portfolio that has $4,000 invested in Stock X and $6,500 invested in Stock Y. Do not round intermediate calculations. Round your answer to two decimal places.
rp =
If the market risk premium increased to 6%, which of the two stocks would have the larger increase in its required return?
A)Stock X
B)Stock Y