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    Probabilit y X Y: R R P R R R

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    Arlene Garcia
    This document contains calculations to analyze the risk and return of two stocks, X and Y. It finds that: 1) Stock X has an expected return of 12% and standard deviation of 12.2%, while Stock Y has an expected return of 14% and standard deviation of 20.35%. 2) The coefficient of variation for Stock X is 1.02, and for Stock Y is 1.45. 3) Most investors would likely regard Stock Y as riskier than Stock X, despite its higher expected return, because it has a significantly higher standard deviation measuring the volatility of its returns.

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    Probabilit y X Y: R R P R R R

    Uploaded by

    Arlene Garcia
    18 views3 pages
    This document contains calculations to analyze the risk and return of two stocks, X and Y. It finds that: 1) Stock X has an expected return of 12% and standard deviation of 12.2%, while Stock Y has an expected return of 14% and standard deviation of 20.35%. 2) The coefficient of variation for Stock X is 1.02, and for Stock Y is 1.45. 3) Most investors would likely regard Stock Y as riskier than Stock X, despite its higher expected return, because it has a significantly higher standard deviation measuring the volatility of its returns.

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    Activity-4. Garcia

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    This document contains calculations to analyze the risk and return of two stocks, X and Y. It finds that: 1) Stock X has an expected return of 12% and standard deviation of 12.2%, while Stock Y has an expected return of 14% and standard deviation of 20.35%. 2) The coefficient of variation for Stock X is 1.02, and for Stock Y is 1.45. 3) Most investors would likely regard Stock Y as riskier than Stock X, despite its higher expected return, because it has a significantly higher standard deviation measuring the volatility of its returns.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    18 views3 pages

    Probabilit y X Y: R R P R R R

    Uploaded by

    Arlene Garcia
    This document contains calculations to analyze the risk and return of two stocks, X and Y. It finds that: 1) Stock X has an expected return of 12% and standard deviation of 12.2%, while Stock Y has an expected return of 14% and standard deviation of 20.35%. 2) The coefficient of variation for Stock X is 1.02, and for Stock Y is 1.45. 3) Most investors would likely regard Stock Y as riskier than Stock X, despite its higher expected return, because it has a significantly higher standard deviation measuring the volatility of its returns.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 3

    Garcia, Arlene Joy S.

    BSA-2 ACC 216 9:45-11:45 am

    Probabilit
    y X Y
    0.1 -10% -35%
    0.2 2% 0%
    0.4 12% 20%
    0.2 20% 25%
    0.1 38% 45%

    a. Calculate the expected rate of return for


    both Stock X and Y.

    r^ =¿ Expected rate of return of X


    N
    r^ =∑ Pi r i
    i−1

    r^ =¿ (0.1)(-10%)+(0.2)(2%)+(0.4)(12%)+(0.2)(20%)+(0.1)(38%)
    r^ =¿ 0.12

    r^ =¿ Expected rate of return of Y


    N
    r^ =∑ Pi r i
    i−1

    r^ =¿ (0.1)(-35%)+(0.2)(0%)+(0.4)(20%)+(0.2)(25%)+(0.1)(45%)

    r^ =¿ 0.14
    b. Calculate the standard deviation of expected returns for both stocks.

    σ =¿ Standard Deviation of X
    N
    σ= √∑
    i−1
    ( r−r^ ) Pi

    σ =¿ [(-10%-0.12)2 (0.1)+ (2%-0.12)2 (0.2)+ (12%-0.12)2 (0.4)+ (20%-0.12)2 (0.2)+


    (38%-0.12)2 (0.1)]
    =√0.01488
    =0.1220
    σ =¿ 12.20%

    σ =¿ Standard Deviation of Y
    N
    σ= √∑
    i−1
    ( r−r^ ) Pi

    σ =¿ [(-35%-0.14)2 (0.1)+ (0%-0.14)2 (0.2)+ (20%-0.14)2 (0.4)+ (25%-0.14)2 (0.2)+


    (45%-0.14)2 (0.1)]
    =√0.0414
    =0.2035
    σ =¿20.35%

    c. Calculate the coefficient of variation for both stocks.

    CV =¿ Coefficient of Variation of X
    σ
    CV =
    r^
    CV =¿ 12.20%/0.12

    CV =¿ 1.02
    CV =¿ Coefficient of Variation of Y
    σ
    CV =
    r^
    CV =¿ 20.35%/0.14

    CV =¿ 1.45

    d. Question: Is it possible that most investors will regard Stock Y as being less risky
    than Stock X? Explain.
    - To compare, Stock Y has more risk of returns than Stock X since the
    standard deviation of Stock Y is greater than Stock X. If we look at the
    expected returns of the two stocks, Stock Y has higher expected return
    than Stock X. It is not possible that most investors will regard Stock Y
    as being less risky since its measure of risk is 0.2035 and it has large
    gap than Stock X though Stock Y has higher returns but their
    difference are not that high. With the results above, investors will
    probably regard Stock Y as riskier than Stock X.

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