Excel Online Structured Activity: Evaluating risk and return Stock X has a 9.5% expected return, a...

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Excel Online Structured Activity: Evaluating risk and return

Stock X has a 9.5% expected return, a beta coefficient of 0.8,and a 30% standard deviation of expected returns. Stock Y has a12.0% expected return, a beta coefficient of 1.1, and a 30.0%standard deviation. The risk-free rate is 6%, and the market riskpremium is 5%. The data has been collected in the Microsoft ExcelOnline file below. Open the spreadsheet and perform the requiredanalysis to answer the questions below.

Evaluating risk and return

Expected return of Stock X	9.50%
Beta coefficient of Stock X	0.80
Standard deviation of Stock X returns	30.00%

Expected return of Stock Y	12.00%
Beta coefficient of Stock Y	1.10
Standard deviation of Stock Y returns	30.00%

Risk-free rate (rRF)	6.00%
Market risk premium (RPM)	5.00%

Dollars of Stock X in portfolio	$7,500.00
Dollars of Stock Y in portfolio	$5,500.00
		Formulas
Coefficient of Variation for Stock X		#N/A
Coefficient of Variation for Stock Y		#N/A

Riskier stock to a diviersified investor		#N/A

Required return for Stock X		#N/A
Required return for Stock Y		#N/A

Stock more attractive to a diversified investor		#N/A

"Required return of portfolio containing Stocks X and Y inamounts above"		#N/A

New market risk premium	6.00%
With new market risk premium, stock with larger increase inrequired return		#N/A

Check:
New required return, Stock X		#N/A
Change in required return, Stock X		#N/A

New required return, Stock Y		#N/A
Change in required return, Stock Y		#N/A

Stock with greater change in required return		#N/A

Calculate each stock's coefficient of variation. Round youranswers to two decimal places. Do not round intermediatecalculations.
CV_x =
CV_y =
Which stock is riskier for a diversified investor?
1. For diversified investors the relevant risk is measured bystandard deviation of expected returns. Therefore, the stock withthe higher standard deviation of expected returns is more risky.Stock X has the higher standard deviation so it is more risky thanStock Y.
2. For diversified investors the relevant risk is measured bybeta. Therefore, the stock with the lower beta is more risky. StockX has the lower beta so it is more risky than Stock Y.
3. For diversified investors the relevant risk is measured bystandard deviation of expected returns. Therefore, the stock withthe lower standard deviation of expected returns is more risky.Stock Y has the lower standard deviation so it is more risky thanStock X.
4. For diversified investors the relevant risk is measured bybeta. Therefore, the stock with the higher beta is less risky.Stock Y has the higher beta so it is less risky than Stock X.
5. For diversified investors the relevant risk is measured bybeta. Therefore, the stock with the higher beta is more risky.Stock Y has the higher beta so it is more risky than Stock X.
_____IIIIIIIVV
Calculate each stock's required rate of return. Round youranswers to two decimal places.
r_x = %
r_y = %
On the basis of the two stocks' expected and required returns,which stock would be more attractive to a diversified investor?
_________Stock XStock Y
Calculate the required return of a portfolio that has $7,500invested in Stock X and $5,500 invested in Stock Y. Do not roundintermediate calculations. Round your answer to two decimalplaces.
r_p = %
If the market risk premium increased to 6%, which of the twostocks would have the larger increase in its required return?
_________Stock XStock Y

Answer & Explanation Solved by verified expert

3.6 Ratings (644 Votes)

Answer a CVx 00316 or 316 CVy 0025 or 250 Particulars Standard Deviation Expected Return Coefficient Of Variation a b ab Stock X 30 95 316 Stock Y 30 12 25 b Statement IIIIIIIV are incorrect only Statement V is Correct I The statement is incorrect as both the stocks have same standard deviation both the stocks are equally risky in terms of standard deviation II The statement is incorrect Stock with higher Beta is more volatile hence riskier as compared to stock with low beta Thus stock X is less riskier than See Answer

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Excel Online Structured Activity: Evaluating risk and returnStock X has a 9.5% expected return, a beta coefficient of 0.8,and a 30% standard deviation of expected returns. Stock Y has a12.0% expected return, a beta coefficient of 1.1, and a 30.0%standard deviation. The risk-free rate is 6%, and the market riskpremium is 5%. The data has been collected in the Microsoft ExcelOnline file below. Open the spreadsheet and perform the requiredanalysis to answer the questions below. Evaluating risk and returnExpected return of Stock X9.50%Beta coefficient of Stock X0.80Standard deviation of Stock X returns30.00%Expected return of Stock Y12.00%Beta coefficient of Stock Y1.10Standard deviation of Stock Y returns30.00%Risk-free rate (rRF)6.00%Market risk premium (RPM)5.00%Dollars of Stock X in portfolio$7,500.00Dollars of Stock Y in portfolio$5,500.00FormulasCoefficient of Variation for Stock X#N/ACoefficient of Variation for Stock Y#N/ARiskier stock to a diviersified investor#N/ARequired return for Stock X#N/ARequired return for Stock Y#N/AStock more attractive to a diversified investor#N/A"Required return of portfolio containing Stocks X and Y inamounts above"#N/ANew market risk premium6.00%With new market risk premium, stock with larger increase inrequired return#N/ACheck:New required return, Stock X#N/AChange in required return, Stock X#N/ANew required return, Stock Y#N/AChange in required return, Stock Y#N/AStock with greater change in required return#N/ACalculate each stock's coefficient of variation. Round youranswers to two decimal places. Do not round intermediatecalculations.CVx =CVy =Which stock is riskier for a diversified investor?For diversified investors the relevant risk is measured bystandard deviation of expected returns. Therefore, the stock withthe higher standard deviation of expected returns is more risky.Stock X has the higher standard deviation so it is more risky thanStock Y.For diversified investors the relevant risk is measured bybeta. Therefore, the stock with the lower beta is more risky. StockX has the lower beta so it is more risky than Stock Y.For diversified investors the relevant risk is measured bystandard deviation of expected returns. Therefore, the stock withthe lower standard deviation of expected returns is more risky.Stock Y has the lower standard deviation so it is more risky thanStock X.For diversified investors the relevant risk is measured bybeta. Therefore, the stock with the higher beta is less risky.Stock Y has the higher beta so it is less risky than Stock X.For diversified investors the relevant risk is measured bybeta. Therefore, the stock with the higher beta is more risky.Stock Y has the higher beta so it is more risky than Stock X._____IIIIIIIVVCalculate each stock's required rate of return. Round youranswers to two decimal places.rx = %ry = %On the basis of the two stocks' expected and required returns,which stock would be more attractive to a diversified investor?_________Stock XStock YCalculate the required return of a portfolio that has $7,500invested in Stock X and $5,500 invested in Stock Y. Do not roundintermediate calculations. Round your answer to two decimalplaces.rp = %If the market risk premium increased to 6%, which of the twostocks would have the larger increase in its required return?_________Stock XStock Y