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EXPECTED RETURNS Stocks A and B have the following probability distributions of expected future returns: Probability A B 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, r ^ B , foe stock B ( r ^ A = 12%). b. Calculate the standard deviation of expected returns, σ A , for Stock A(σ B = 20.35%). Now calculate the coefficient of variation for Stock B. Is it possible the most investors will regard Stock B as being less risky than Stock A? Explain. c. Assume the risk–free rate 2.5%. What are the Sharpe ratios for Stocks A and B? Are these calculations consistent with the information obtained from the coefficient of variation calculations in part b? Explain.

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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781337395250
BuyFind

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
Publisher: Cengage Learning
ISBN: 9781337395250

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Chapter
Section
Chapter 8, Problem 6P
Textbook Problem

EXPECTED RETURNS Stocks A and B have the following probability distributions of expected future returns:

Probability A B
0.1 (10%) (35%)
0.2 2 0
0.4 12 20
0.2 20 25
0.1 38 45
  1. a. Calculate the expected rate of return, r ^ B , foe stock B ( r ^ A = 12%).
  2. b. Calculate the standard deviation of expected returns, σA, for Stock A(σB = 20.35%). Now calculate the coefficient of variation for Stock B. Is it possible the most investors will regard Stock B as being less risky than Stock A? Explain.
  3. c. Assume the risk–free rate 2.5%. What are the Sharpe ratios for Stocks A and B? Are these calculations consistent with the information obtained from the coefficient of variation calculations in part b? Explain.

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Chapter 8 Solutions

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