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.
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 =30%/9.5%=3.16
CVy =Standard Deviation/Expected Return =25%/12.0%=2.08
b. Option IV 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%+1.1*5%=11.50%
d. Stock Y expected return is greater than required rate(12%
>11.50%);Stock Y is more attractive.
e. The required rate of portfolio =2500/4500*10%+2000/4500*11.50%
=10.67%
f. Required rate of Stock Y will increase more because beta of stock y is 1.1
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