HW4solutions

# HW4solutions - Chapter 6 Analysis of Risk and Return Home...

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Chapter 6 Analysis of Risk and Return 6-1 Home Work 4 Solutions 1. a. E(R X ) = .1(-10%) + .2(10%) + .4(15%) + .2(20%) + .1(40%) = 15% E(R Y ) = .2(2%) + .2(7%) + .3(12%) + .2(15%) + .1(16%) = 10% b. σ X = [(-10-15) 2 .1 + (10-15) 2 .2 + (15-15) 2 .4 + (20-15) 2 .2 + (40-15) 2 .1] .5 = 11.62% σ Y = [(2-10) 2 .2 + (7-10) 2 .2 + (12-10) 2 .3 + (15-10) 2 .2 + (16-10) 2 .1] .5 = 4.94% c. Stock X is riskier because it has a higher standard deviation of returns than Y. The coefficient of variation of returns is also higher for X (0.77) than for Y (0.49). 3. a. The coefficient of variation of returns for Cornhusker's stock is 0.75 (15%/20%). The coefficient of variation of returns for Mustang's stock is 0.90 (9%/10%). Therefore, according to the coefficient of variation criterion (which considers total risk -- both systematic and unsystematic), Mustang's stock is riskier. b. Looking only at systematic risk (i.e., assuming that investors are well- diversified), Cornhusker appears to be riskier . 4.

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HW4solutions - Chapter 6 Analysis of Risk and Return Home...

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