Question

Excel Online Activity: Evaluating risk and return Question 1 0/10 Submit Excel Online Structured Activity: Evaluating risk and return Stock X has a 9.5% expected return, a beta coefficient of 0.8, and a 35% 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%. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below. Open spreadsheet a. Calculate each stock's coefficient of variation. Round your answers to two decimal places. Do not round intermediate calculations. CVX = CV, = b. Which stock is riskier for a diversified investor? I. For diversified investors the relevant risk is measured by beta. Therefore, the stock with the higher beta is more risky. Stock Y has the higher beta so it is more risky than Stock X. II. For diversified investors the relevant risk is measured by standard deviation of expected returns. Therefore, the stock with the higher standard deviation of expected returns is more risky. Stock X has the higher standard deviation so it is more risky than

Answer 1

a) Coefficient of variations = Standard deviations/Expected return X = (0.35/0.095) 3.68 Y = (0.25/0.12) = 2.08 For a diversified investor the risk is measured the beta and higher the beta higher is the risk comparative to the market The correct answer is (1) For diversified investor the relevant risk is measured by beta. Therefore the stock with higher beta is more risky. Stock Y has the higher beta so it is more risky than stock X c) The required rate of return = = risk free rate + beta* Market risk premium X = = (6 +0.8* 5) 10% Y = (6 + 1.1*5) 11.50% For the stock to be attractive the expected return should be higher than the required rate Stock Y has 12% expected rate of return which is higher than the required rate of 11.50% hence the stock Y is attractive Stock X expected return is less than the required rate of return e) Total investment = (8000 + 6500) 14500 Required return on the portfolio would be (10*(8000/14500) + 11.5*(6500/14500)) 10.67