Stocks A and B have the following probability distributions of expected future returns:
Probability | A | B | ||
0.1 | (15 | %) | (30 | %) |
0.1 | 3 | 0 | ||
0.5 | 14 | 23 | ||
0.2 | 18 | 26 | ||
0.1 | 36 | 47 |
%
%
Now calculate the coefficient of variation for Stock B. Do not round intermediate calculations. Round your answer to two decimal places.
Is it possible that most investors might regard Stock B as being less risky than Stock A?
-Select-IIIIIIIVVItem 4
Assume the risk-free rate is 1.5%. What are the Sharpe ratios for Stocks A and B? Do not round intermediate calculations. Round your answers to four decimal places.
Stock A:
Stock B:
Are these calculations consistent with the information obtained from the coefficient of variation calculations in Part b?
-Select-IIIIIIIVVItem 7
1.
=0.1*(-30%)+0.1*0%+0.5*23%+0.2*26%+0.1*47%=18.40%
2.
=SQRT(0.1*(-15%-13%)^2+0.1*(3%-13%)^2+0.5*(14%-13%)^2+0.2*(18%-13%)^2+0.1*(36%-13%)^2)=12.1161049846888%
3.
=19.29%/18.40%
=1.04837
4.
If Stock B is less highly correlated with the market than A, then
it might have a lower beta than Stock A, and hence be less risky in
a portfolio sense.
5.
=(13%-1.5%)/12.1161049846888%
=0.94915
6.
=(18.40%-1.5%)/19.29%
=0.87610
7.
In a stand-alone risk sense A is less risky than B. If Stock B is
less highly correlated with the market than A, then it might have a
lower beta than Stock A, and hence be less risky in a portfolio
sense.
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