EVALUATING RISK AND RETURN 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%.
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 stocks’ 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%, which of the two stocks would have the larger increase in its required return?