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QUESTION

The Standard Deviations and expected rates of return, r ^, r with a hat, are listed below for 5 stocks. Calculate the Coefficient of Variations for...

The Standard Deviations and expected rates of return, r ^, r with a hat, are listed below for 5 stocks. Calculate the Coefficient of Variations for each.

Stock              STANDARD DEVIATIONS              EXPECTED R OF R, r^         CV

A                     5%                                                      20%                                        ____

B                     6%                                                      24%                                        ____

C                    7%                                                      28%                                        ____

D                    8%                                                      32%                                        ____

E                     20%                                                    80%                                        ____

Which stock is the riskiest stock? ____________

Explain

The risk free rate on a stock is 3%, the required rate in the market is 7%, and the beta is 1.6. This is the original position. Calculate the required rate of return, r.

Based on the above, now assume that inflation is expected to increase by 2%. Calculate the required rate of return. 2 points, show work

What happens to the SML? Circle one: Shifts Up or Shifts Down or Pivots Up or Pivots Down

What happens to the slope? Circle one: Slope remains the same or Slope gets steeper or Slope gets flatter

Now assume that inflation is expected to decrease by 1%. Calculate the required rate of return.

What happens to the SML? Circle one: Shifts Up or Shifts Down or Pivots Up or Pivots Down

What happens to the slope? Circle one: Slope remains the same or Slope gets steeper or Slope gets flatter

Now assume that investors are fearful, uneasy, with the current market situation and require a higher rate of return in the market. Thus, rm increases by 2.5%.  Calculate the required rate of return.

What happens to the SML? Circle one: Shifts Up or Shifts Down or Pivots Up or Pivots Down

What happens to the slope? Circle one:Slope remains the same or Slope gets steeper or Slope gets flatter

Now assume that investors are confident, at ease, with the current market situation and require a lower rate of return in the market. Thus, rm decreases by 1%. Calculate the required rate of return.

What happens to the SML? Circle one:Shifts Up or Shifts Down or Pivots Up or Pivots Down

What happens to the slope? Circle one:

Slope remains the same or Slope gets steeper or Slope gets flatter