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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?

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Fundamentals Of Financial Manageme...

10th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781337902571
BuyFind

Fundamentals Of Financial Manageme...

10th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781337902571

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Chapter
Section
Chapter 8, Problem 19P
Textbook Problem

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%.

  1. a. Calculate each stock’s coefficient of variation.
  2. b. Which stock is riskier for a diversified investor?
  3. c. Calculate each stock’s required rate of return.
  4. d. On the basis of the two stocks’ expected and required returns, which stock would be more attractive to a diversified investor?
  5. e. Calculate the required return of a portfolio that has $7,500 invested in Stock X and $2,500 invested in Stock Y.
  6. f. If the market risk premium increased to 6%, which of the two stocks would have the larger increase in its required return?

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Chapter 8 Solutions

Fundamentals Of Financial Management, Concise Edition (mindtap Course List)
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Ch. 8 - ABC Company's, stock earned a return of 10% this...Ch. 8 - EXPECTED RETURN A stocks returns have the...Ch. 8 - PORTFOLIO BETA An individual has 20,000 invested...Ch. 8 - REQUIRED RATE OF RETURN Assume that the risk-free...Ch. 8 - EXPECTED AND REQUIRED RATES OF RETURN Assume that...Ch. 8 - BETA AND REQUIRED RATE OF RETURN A stock has a...Ch. 8 - EXPECTED RETURNS Stocks A and B have the following...Ch. 8 - PORTFOLIO REQUIRED RETURN Suppose you are the...Ch. 8 - BETA COEFFICIENT Given the following; information,...Ch. 8 - REQUIRED RATE OF RETURN Stock R has a beta of 2.0,...Ch. 8 - CAPM AND REQUIRED RETURN Beale Manufacturing...Ch. 8 - CAPM AND REQUIRED RETURN Calculate the required...Ch. 8 - REQUIRED RATE OF RETURN Suppose rRF = 4%, rM =...Ch. 8 - CAPM, PORTFOLIO RISK, AND RETURN Consider the...Ch. 8 - PORTFOLIO BETA Suppose you held a diversified...Ch. 8 - CAPM AND REQUIRED RETURN HR Industries (HRI) has a...Ch. 8 - CAPM AND PORTFOLIO RETURN You have been managing a...Ch. 8 - PORTFOLIO BETA A mutual fund manager has a 20...Ch. 8 - EXPECTED RETURNS Suppose you won the lottery and...Ch. 8 - EVALUATING RISK AND RETURN Stock X has a 10%...Ch. 8 - REALIZED RATES OF RETURN Stocks A and have the...Ch. 8 - SECURITY MARKET LINE You plan to invest in the...Ch. 8 - EVALUATING RISK AND RETURN Bartman Industriess and...Ch. 8 - RISK AND RETURN Assume that you recently graduated...Ch. 8 - Begin by looking at the historical performance of...Ch. 8 - USING PAST INFORMATION TO ESTIMATE REQUIRED...Ch. 8 - USING PAST INFORMATION TO ESTIMATE REQUIRED...Ch. 8 - Go back to the summary page to see an estimate of...Ch. 8 - Assume that the risk-free rate is 4% and the...Ch. 8 - Beta pf CPB company Beta of the MSI Company is...

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