Subject: Financial strategy & policy 8-6: EXPECTED RETURNS Stocks X and Y have the following probability distributions of expected future returns: Probability X Y 0.1 (10%) (35%) 0.2 2 0 0.4 12 20 0.2...

Subject: Financial strategy & policy

8-6:
EXPECTED RETURNS Stocks X and Y have the following probability distributions of expected future returns:

a.)
Calculate the expected rate of return, ^rY, for Stock Y (^rX ¼ 12%).

b.)
Calculate the standard deviation of expected returns, X, for Stock X (Y ¼ 20.35%). Now calculate the coefficient of variation for Stock Y. Is it possible that most investors will regard Stock Y as being less risky than Stock X? Explain.