Jimenez, Angel Kaye BSA-2 ACC216 9:45-11:45 September 22, 2020

Requirement #1: Calculate the expected rate of return for both Stock X and Y.

Economy Probability x y
Recession 0.1 -10% -1 -35% -3.5
Below Average 0.2 2% 0.4 0 0
Average 0.4 12% 4.8 20% 8
Above average 0.2 20% 4 25% 5
Boom 0.1 38% 3.8 45% 4.5
Expected Rate of Return r̂ 0.12% 0.14%

Requirement #2: Calculate the standard deviation of expected returns for both stocks.

Economy Probability x 𝛔𝟐 = [(𝒓 − 𝒓̂)𝟐 (𝑷𝒊 )] y

𝛔𝟐 = [(𝒓 − 𝒓̂)𝟐 (𝑷𝒊 )]
- 240.1
Recession 0.1 -10% -1 48.4 -3.5
35%
Below 39.2
0.2 2% 0.4 20.0 0 0
Average
Average 0.4 12% 4.8 0.0 20% 8 14.4
Above 24.2
0.2 20% 4 12.8 25% 5
average
Boom 0.1 38% 3.8 67.6 45% 4.5 96.1
Σ𝛔 𝟐
148.8 Σ𝛔 𝟐 414
20.35%
√Σ𝛔𝟐 12.20% √Σ𝛔𝟐
 Requirement #3: Calculate the coefficient of variation for both stocks.

Economy X Y
r̂  CV=
𝑺𝒕𝒂𝒏𝒅𝒂𝒓𝒅 𝑫𝒆𝒗𝒊𝒂𝒕𝒊𝒐𝒏 r̂  CV=
𝑺𝒕𝒂𝒏𝒅𝒂𝒓𝒅 𝑫𝒆𝒗𝒊𝒂𝒕𝒊𝒐𝒏
𝑬𝒙𝒑𝒆𝒄𝒕𝒆𝒅 𝒓𝒂𝒕𝒆 𝒐𝒇 𝒓𝒆𝒕𝒖𝒓𝒏 𝑬𝒙𝒑𝒆𝒄𝒕𝒆𝒅 𝒓𝒂𝒕𝒆 𝒐𝒇 𝒓𝒆𝒕𝒖𝒓𝒏
Recession -1 48.4 -3.5 240.1
Below 39.2
0.4 20.0 0
Average
Average 4.8 0.0 8 14.4
Above 24.2
4 12.8 5
average
Boom 3.8 67.6 4.5 96.1
148.8 𝟏𝟐. 𝟐𝟎 414 𝟐𝟎. 𝟑𝟓
12% 𝑪𝑽 = = 𝟏. 𝟎𝟐 14%
20.35% 𝑪𝑽 = = 𝟏. 𝟒𝟓
√Σ𝛔 = 12.20%
𝟐
𝟏𝟐 𝟏𝟒

Requirement #4 : Question: Is it possible that most investors will regard Stock Y as being less risky
than Stock X? Explain.

As a risk investor, comparing the two stock. Stock Y may be a good investment
compared to Stock X because it has a greater expected return rate than Stock X. Stock Y
has 14.05% expected rate of return to investors compared to Stock X which has 12%
expected rate of return. Comparing the two stock on the standard deviation, Stock Y has
a bigger risk than stock X on about 8.15 percent more. There is no probability that investor
will regard that Stock Y has a lesser risk than Stock X.