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