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.
CV_{x} = _____
CV_{y} = _____
Calculate each stock's required rate of return. Round your answers to two decimal places.
r_{x} = ______ %
r_{y} = _____ %
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
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