Investments, tenth edition

Forecast Returns, Standard Deviations, and Betas

Forecast Return

Standard Deviation

Beta

Stock X

14.0%

36%

0.8

Stock Y

17.0

25

1.5

Market index

14.0

15

1.0

Risk-free rate

  5.0

     a.   Calculate expected return and alpha for each stock.  

    b.   Identify and justify which stock would be more appropriate for an investor who wants to

      i.   add this stock to a well-diversified equity portfolio.  

    ii.   hold  this  stock  as  a  single-stock  portfolio.          

 E-INVESTMENTS EXERCISES 

 Fidelity provides data on the risk and return of its funds at   www.fidelity.com  . Click on 

the  Research  link, then choose  Mutual Funds  from the submenu. In the  Fund Evaluator  

section, search over all open no-load funds. On the next screen, click on  Risk/ Volatility 

Measures  and indicate that you want to screen for funds with betas less than or equal to 

.50. Click  Search Funds  to see the results. Select five funds from the resulting list and click 

 Compare.  Rank the five funds according to their betas and then according to their stan-

dard deviations. Do both lists rank the funds in the same order? How would you explain 

any difference in the rankings? Repeat the exercise to compare five funds that have betas 

greater than or equal to 1.50. Why might the degree of agreement when ranking funds by 

beta versus standard deviation differ when using high versus low beta funds?