PROBABILITY X Y Rate of return Y Rate of return X

1. Stocks X and Y have the following probability distributions of expected future returns:

PROBABILITY X Y Rate of return Y Rate of return X
10% -10% -35% -4% -1%
20% 20% 0% 0% 4%
40% 12% 20% 8% 5%
20% 20% 25% 5% 4%
10% 38% 45% 5% 4%

a.  Calculate the expected rate of return, khat, for Stock Y (expected return for Stock X, Kx hat, equals 12%).

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