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.
Calculate each stock's required rate of return. Round your answers to two decimal places.
rx = %
ry = %
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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