Stock X has a 10 percent expected return, a beta coefficient of 0.9, and a 35 percent standard deviation of expected returns. Stock Y has a 12.5 percent expected return, a beta coefficient of 1.2, and a 25 percent standard deviation. The risk-free rate is 6percent, and the market risk premium is 5 percent.
(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 stock’s 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 percent, which of the two stocks would have a larger increase in its required return?