EXPECTED RETURNS Stocks X and Y have the following probability distributions of expected future returns: Probability X Y 0.1 (10%) (35%) 0.2 2 0 0.4 12 20 0.2 20 25 0.1 38 45 a.) Calculate the expected rate of return, ^rY, for Stock Y (^rX ¼ 12%). b.) Calculate the standard deviation of expected returns, X, for Stock X (Y ¼ 20.35%). Now calculate the coefficient of variation for Stock Y. Is it possible that most investors will regard Stock Y as being less risky than Stock X? Explain.
EXPECTED RETURNS Stocks X and Y have the following probability distributions of expected future returns: Probability X Y 0.1 (10%) (35%) 0.2 2 0 0.4 12 20 0.2 20 25 0.1 38 45 a.) Calculate the expected rate of return, ^rY, for Stock Y (^rX ¼ 12%). b.) Calculate the standard deviation of expected returns, X, for Stock X (Y ¼ 20.35%). Now calculate the coefficient of variation for Stock Y. Is it possible that most investors will regard Stock Y as being less risky than Stock X? Explain.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Subject: Financial strategy & policy
8-6: EXPECTED RETURNS Stocks X and Y have the following probability distributions of expected future returns:
| Probability | X | Y |
| 0.1 | (10%) | (35%) |
| 0.2 | 2 | 0 |
| 0.4 | 12 | 20 |
| 0.2 | 20 | 25 |
| 0.1 | 38 | 45 |
a.) Calculate the expected rate of return, ^rY, for Stock Y (^rX ¼ 12%).
b.) Calculate the standard deviation of expected returns, X, for Stock X (Y ¼ 20.35%). Now calculate the coefficient of variation for Stock Y. Is it possible that most investors will regard Stock Y as being less risky than Stock X? Explain.
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