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 = _____
Calculate each stock's required rate of return. Round your answers to two decimal places.
rx = ______ %
ry = _____ %
a. CVx =Standard Deviation/Expected Return
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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