Question

Stock X has a 10% expected return, a beta coefficient of 0.9, and a 35% standard...

Stock X has a 10% expected return, a beta coefficient of 0.9, and a 35% standard deviation of expected returns. Stock Y has a 12.5% expected return, a beta coefficient of 1.2, and a 25% standard deviation. The risk-free rate is 6%, and the market risk premium is 5%.

a. Calculate each stock’s coefficient of variation.

b. Which stock is riskier for a diversified investor?

c. Calculate each stock’s required rate of return.

d. On the basis of the two stocks’ expected and required returns, which stock would be more attractive to a diversified investor?

e. Calculate the required return of a portfolio that has $7,500 invested in Stock X and $2,500 invested in Stock Y.

f. If the market risk premium increased to 6%, which of the two stocks would have the larger increase in its required return?

(Please make work neat and understandable)

Homework Answers

Answer #1

1.
Coefficient of variation=Standard deviation/Expected return
Stock X=35%/10%=3.50000

Stock Y=25%/12.5%=2.00000

2.
The relevant measure of risk for a well diversified investor is beta. Higher beta means higher risk. Hence, Stock Y is riskier.

3.
required return=risk free rate+beta*market risk premium

Stock X=6%+0.9*5%=10.50%
Stock Y=6%+1.2*5%=12.00%

4.
Stock Y as expected return is more than required return

5.
=(7500*10.50%+2500*12.00%)/(7500+2500)
=10.8750%

6.
Stock Y as it has higher beta

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Stock X has a 10% expected return, a beta coefficient of 0.9, and a 35% standard...
Stock X has a 10% expected return, a beta coefficient of 0.9, and a 35% standard deviation of expected returns. Stock Y has a 12.5% expected return, a beta coefficient of 1.2, and a 25% standard deviation. The risk-free rate is 6%, and the market risk premium is 5%. a. Calculate each stock’s coefficient of variation. b. Which stock is riskier for a diversified investor? c. Calculate each stock’s required rate of return. d. On the basis of the two...
Stock X has a 10.0% expected return, a beta coefficient of 0.9, and a 40% standard...
Stock X has a 10.0% expected return, a beta coefficient of 0.9, and a 40% standard deviation of expected returns. Stock Y has a 13.0% expected return, a beta coefficient of 1.3, and a 20% standard deviation. The risk-free rate is 6%, and the market risk premium is 5%. Calculate each stock's coefficient of variation. Do not round intermediate calculations. Round your answers to two decimal places. CVx = CVy = Which stock is riskier for a diversified investor? For...
Stock X has a 9.0% expected return, a beta coefficient of 0.7, and a 35% standard...
Stock X has a 9.0% expected return, a beta coefficient of 0.7, and a 35% standard deviation of expected returns. Stock Y has a 13.0% expected return, a beta coefficient of 1.3, and a 25% standard deviation. The risk-free rate is 6%, and the market risk premium is 5%. Calculate each stock's coefficient of variation. Do not round intermediate calculations. Round your answers to two decimal places. CVx = CVy = Which stock is riskier for a diversified investor? For...
Stock X has a 10.0% expected return, a beta coefficient of 0.9, and a 35% standard...
Stock X has a 10.0% expected return, a beta coefficient of 0.9, and a 35% standard deviation of expected returns. Stock Y has a 12.0% expected return, a beta coefficient of 1.1, and a 25.0% 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 = CVy = Which stock is riskier for a diversified investor? For...
Stock X has a 10.5% expected return, a beta coefficient of 1.0, and a 35% standard...
Stock X has a 10.5% expected return, a beta coefficient of 1.0, and a 35% standard deviation of expected returns. Stock Y has a 12.5% expected return, a beta coefficient of 1.2, 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 = CVy = Which stock is riskier for a diversified investor? For...
Stock X has a 9.5% expected return, a beta coefficient of 0.8, and a 35% standard...
Stock X has a 9.5% expected return, a beta coefficient of 0.8, and a 35% standard deviation of expected returns. Stock Y has a 12.5% expected return, a beta coefficient of 1.2, and a 30.0% 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 = _____ CVy = _____ Which stock is riskier for a diversified...
Stock X has a 10.5% expected return, a beta coefficient of 1.0, and a 35% standard...
Stock X has a 10.5% expected return, a beta coefficient of 1.0, and a 35% standard deviation of expected returns. Stock Y has a 12.0% expected return, a beta coefficient of 1.1, and a 30.0% 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 = CVy = Which stock is riskier for a diversified investor? For...
Stock X has a 9.5% expected return, a beta coefficient of 0.8, and a 30% standard...
Stock X has a 9.5% expected return, a beta coefficient of 0.8, and a 30% standard deviation of expected returns. Stock Y has a 12.0% expected return, a beta coefficient of 1.1, and a 25.0% 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 = CVy = Which stock is riskier for a diversified investor? For...
Stock X has a 10.5% expected return, a beta coefficient of 1.0, and a 30% standard...
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 12.0% expected return, a beta coefficient of 1.1, and a 30.0% 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 =   CVy =   Which stock is riskier for a diversified investor? For...
Suppose you collect the information of two stocks: Expected Return Standard Deviation Beta Stock A 13%...
Suppose you collect the information of two stocks: Expected Return Standard Deviation Beta Stock A 13% 15% 1.6 Stock B 9.2% 25% 1.1                                                                                                                                                                                                         a. If you have a well-diversified portfolio of 50 stocks and you are considering adding either Stock A or B to that portfolio, which one is a riskier addition and why? If you are a new investor looking for your first stock investment, which is a riskier investment for you and why? b. If the...