Coefficient of Variation Beta MRP rate of return

QUESTION

Levine Inc. is considering an investment that has an expected return of 15% and a standard deviation of 10%. What is the investments coefficient of variation?Desreumaux Incs stock has an expected return of 12.25%, a beta of 1.25, and is in equilibrium. If the risk-free rate is 5.00%, what is the m
Part 1: What is the coefficient of variation? CV is equal to the standard deviation over expected return. I think of it as a measure that shows you how much standard deviation you have to take on for a given expected return. Its helpful for comparing stocks with different expected returns and different standard deviations. Here the answer is 10/15 or 2/3 or .66. This measure would be useful if we were comparing it to another stock with a say a Standard Deviation of 12% and Expected return of 16.5% this would have a CV of 12/16.5 or .72 we would rather take this stock even though it has a higher standard deviation because it gives us more return for our “standard deviation buck” so to speak. Part 2: This is a CAPM type question the formula is CAPM = RFrate MRP*Beta We know the answer to the CPAM is 12.25%, Beta 1.25,

d risk free rate is given as 5% So we have to solve for the MRP using a little algebra. 12.25% = 5% MRP*1.25 7.25%=MRP*1.25 7.25%/1.25= MRP 6% = MRP Part 3: Portfolio Beta Stock a b c d Weight .25 .25 .25 .25 Beta .95 .80 1.0 1.2 Add together Multiply .24 .2 .25 0.3 .9875 is the portfolio Beta Part 4: What is the difference between A and Bs required return. Company A required return = RFrate MRP*Beta 4.25% 6.75%*0.7 = 8.975 Company B required return = RFrate MRP*Beta 4.25 6.75%*1.2 = 12.35 Difference = 12.35-8.975 3.375 Hope this helps!

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