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- From: Business,
- Posted on: Fri 19 Oct, 2012
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Stocks X and Y have the following probability distributions of expected future returns(answer attached)

1. Stocks X and Y have the following probability distributions of expected future returns:

PROBABILITY X Y Rate of return Y Rate of return X

10% -10% -35% -4% -1%

20% 20% 0% 0% 4%

40% 12% 20% 8% 5%

20% 20% 25% 5% 4%

10% 38% 45% 5% 4%

a. Calculate the expected rate of return, khat, for Stock Y (expected return for Stock X, Kx hat, equals 12%).

b. Calculate the standard deviation of expected returns for Stock X. (that for Stock Y is 20.35%). Now Calculate the

coefficient of variation for Stock Y. Is it possible that most investors might regard Stock Y as being less risky than

Stock X? Explain.

Solution Description

1. Stocks X and Y have the following probability distributions of expected future returns:

PROBABILITY X Y Ra