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Your research has determined the following information about the common stock of two particular firms. Stock A Stock B Expected Return: 10% 15% Standard Deviation 5% 9%

Part 1:

1. Explain what is meant by the stock❝s ❝Expected Return❝

2. Calculate each stock❝s coefficient of variation.

Under what situation is the coefficient of variation useful? Briefly explain.

4. Which stock is riskier?

5. What do you base your answer on?

6. What type of risk are we considering here?

7. Is there anything that can be done to reduce this type of risk? If so, what?

8. When is this type of risk most relevant?

Part 2: You did some additional research, and also found the following values for each stock❝s beta coefficient: Stock A Stock B Beta Coefficient 0.7 1.4 Other current information is as follows: --Current Risk-free Rate: 5% --Current Market Rate: 12%

1. What type of risk are we now considering?

2. What is the current Market Risk Premium?

3. What is the required return for each stock suggested by CAPM?

4. Will diversification reduce the type of risk identified in #1 above?

5. Is there anything that can help to reduce this type of risk in a portfolio of stocks? If so, what.

6. Suppose that you invest $1,000 in Stock A, $1,500 in Stock B, and $2,500 in Stock C that has a beta of 2.0. Find your portfolio❝s beta and required rate of return.

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Reid Wolff
Reid WolffLv2
28 Sep 2019

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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?

Evaluating risk and return Stock X has a 10.0% expected return, a beta coefficient of 0.9, and a 40% standard deviation of expected returns. Stock Y has a 12.5% expected return, a beta coefficient of 1.2, 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.

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

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Question 1-1

Security A has an expected return of 7%, a standard deviation of returns of 35%, a correlation coefficient with the market of -0.3, and a beta coefficient of -1.5. Security B has an expected return of 12%, a standard deviation of returns of 10%, a correlation with the market of 0.7, and a beta coefficient of 1.0. Which security is riskier? Why?

Problem 1-2

Assume the risk-free rate is 6% and that the expected return on the market is 13%. What is the required rate of return on a stock that has a beta of 0.7?

Problem 1-3

Suppose rRF = 5% rM = 10%, and rA = 12%

Calculate stock A’s beta.

If stock A’s beta were 2.0, then what would be A’s new required rate of return?

Please forgive me, I posted the first part of this question (the main body) but forgot to post the rest of the question. So here is the full question. Thank you.

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