Question

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%.

  1. Calculate each stock's coefficient of variation. Round your answers to two decimal places. Do not round intermediate calculations.

    CVx = _____

    CVy = _____

  2. Which stock is riskier for a diversified investor?

    -Select-I,II,III,IV,V
    1. 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.
    2. 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.
    3. 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.
    4. 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.
    5. 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.
  3. Calculate each stock's required rate of return. Round your answers to two decimal places.

    rx = ______ %

    ry = _____ %

  4. On the basis of the two stocks' expected and required returns, which stock would be more attractive to a diversified investor?
    -Select-
    1. Stock X
    2. Stock Y
  5. Calculate the required return of a portfolio that has $9,500 invested in Stock X and $4,500 invested in Stock Y. Do not round intermediate calculations. Round your answer to two decimal places.
    rp = ______%
  6. If the market risk premium increased to 6%, which of the two stocks would have the larger increase in its required return?
    -Select-
  7. Stock X
  8. Stock Y

Homework Answers

Answer #1

a. CVx =Standard Deviation/Expected Return =35%/9.5%=3.68
CVy =Standard Deviation/Expected Return =30%/12.5%=2.40

b. Option III is correct option. Higher the beta higher the risk.

c. Rx =Risk free rate+beta*(Market Return-Risk free rate)=6%+0.8*5%=10%
Ry =Risk free rate+beta*(Market Return-Risk free rate)=6%+1.2*5%=12%

d. Stock Y expected return is greater than required rate(12.50% >12%)

e. the required rate of portfolio =9500/(9500+4500)*10%+4500/(9500+4500)*12% =10.64%

f. Required rate of Stock Y will increase more because beta of stock y is 1.2

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 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 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 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 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 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 10.5% 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...
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 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% 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 beta of 0.5 and Stock Y has a beta of 1.5. Which...
Stock X has a beta of 0.5 and Stock Y has a beta of 1.5. Which of the following statements is most correct? Select one: a. If expected inflation increases (but the market risk premium is unchanged), the required returns on the two stocks will decrease by the same amount. b. If investors' aversion to risk decreases (assume the risk-free rate unchanged), Stock X will have a larger decline in its required return than will stock Y. c. If you...