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    Expected Return, Standard Deviation, and Beta

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    1. Common stock A has an expected return of 10%, a standard deviation of future returns of 25%, and a beta of 1.25. Common stock B has an expected return of 12%, a standard deviation of future returns of 15%, and a beta of 1.50. Which stock is riskier? Explain.

    2. a. Suppose you own $1 million worth of 30-year Treasury bonds. Is this asset risk-less? b. Can you think of an asset that is truly risk-less?

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    Solution Preview

    EXPECTED RETURN, STANDARD DEVIATION, AND BETA
    (Guideline in answering the questions)

    1. Common stock A has an expected return of 10%, a standard deviation of future returns of 25%, and a beta of 1.25. Common stock B has an expected return of 12%, a standard deviation of future returns of 15%, and a beta of 1.50. Which stock is riskier?

    Expected returns from an invested are basically the possible outcomes or benefits that an investment would generate. Comparing Common stock A with an expected return of 10% and Common Stock B with an expected return of 12%, common stock B is expected to earn more.
    Keown et al. (2002) noted that standard deviation is a measure of the spread or dispersion about the mean of a probability distribution. To these authors standard deviation operationally measures risk or the prospect of an unfavourable outcome. ...

    Solution Summary

    An analysis of stocks is given. This analysis allows for a determination of the riskier stocks to be given. The solution contains two references.

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