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Security ABC has an expected return of 8%, a standard deviation of returns of 35%, and a beta coefficient of .5. Security XYZ has an expected return of 10%, a standard deviation of returns of 17%, and a beta coefficient of 1.25. Which of these two securities is riskier? Why?

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Sixta Kovacek
Sixta KovacekLv2
5 Nov 2018

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You must add one of two investments to an already well- diversified portfolio.

Security A Security B
Expected Return = 14% Expected Return = 12%
Standard Deviation of Standard Deviation of
Returns = 15.0% Returns = 11%
Beta = 1.5 Beta = 1.5

If you are a risk-averse investor, which one is the better choice?

EVALUATING RISK AND RETURN Stock X has a 10% expected return, a beta coefficient of 0.9, and a 35% standard deviation of expected returns. Stock Y has a 12.5% expected return, a beta coefficient of 1.2, and a 25% standard deviation. The risk-free rate is 6%, and the market risk premium is 5%.
a. Calculate each stock’s coefficient of variation.

b. Which stock is riskier for a diversified investor?

c. Calculate each stock’s required rate of return.

d. On the basis of the two stocks’ expected and required returns, which stock would be
more attractive to a diversified investor?

e. Calculate the required return of a portfolio that has $7,500 invested in Stock X and $2,500 invested in Stock Y.

f. If the market risk premium increased to 6%, which of the two stocks would have the larger increase in its required return?

1. Security C has an expected return of 6% and a standard deviation of 3% while security D has an expected return of 10% and a standard deviation of 7%. The correlation of returns between the two securities is –1.

a) If you place half of the money in each stock, then what is the expected return of this portfolio?

b) If you place 20% of the money in stock C and the remaining in stock D, then what is the expected return of the portfolio?

c) What is the portfolio standard deviation in b above?


2. a) A security has a beta of 1.5 when the risk-free rate is 2.6 percent and the expected return on the market is 12 percent. Calculate the expected return on the security.

b) If the beta on the security in a) increases to 2.5, what is the new expected return? Why does the expected return increase as the beta increases?

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