Question

Historical Returns: Expected and Required Rates of Return

You have observed the following returns over time:

Year |
Stock X |
Stock Y |
Market |

2009 | 16% | 14% | 13% |

2010 | 19 | 6 | 9 |

2011 | -15 | -2 | -13 |

2012 | 2 | 1 | 1 |

2013 | 23 | 11 | 18 |

Assume that the risk-free rate is 3% and the market risk premium is 6%. Do not round intermediate calculations.

- What is the beta of Stock X? Round your answer to two decimal
places.

- What is the beta of Stock Y? Round your answer to two decimal
places.

- What is the required rate of return on Stock X? Round your
answer to one decimal place.

% - What is the required rate of return on Stock Y? Round your
answer to one decimal place.

% - What is the required rate of return on a portfolio consisting of 80% of Stock X and 20% of Stock Y? Round your answer to one decimal place.

Answer #1

The formula for beta is covariance of the return of an asset with the return of the benchmark index divided by the variance of the return of the benchmark over a certain period

We can calculate beta directly in excel using the slope function

Year | Stock X | Stock Y | Market |

2009 | 16% | 14% | 13% |

2010 | 19% | 6% | 9% |

2011 | -15% | -2% | -13% |

2012 | 2% | 1% | 1% |

2013 | 23% | 11% | 18% |

Rf | 3% | ||

Rm-Rf | 6% | ||

a) | 1.256811989 | <--SLOPE(C5:C9,E5:E9) | |

b) | 0.498978202 | <--SLOPE(D5:D9,E5:E9) | |

c) | CAPM | Rf+Beta*(Rm-Rf) | |

10.54% | |||

d) | CAPM | Rf+Beta*(Rm-Rf) | |

5.99% | |||

e) | 9.63% | <--80% X & 20% Y |

The above table gives the case facts along with the answers

Please reach out for any clarifications

Historical Returns: Expected and Required Rates of Return
You have observed the following returns over time:
Year
Stock X
Stock Y
Market
2009
14%
15%
13%
2010
20
7
9
2011
-15
-8
-12
2012
4
2
2
2013
24
13
18
Assume that the risk-free rate is 4% and the market risk premium
is 6%. Do not round intermediate calculations.
What is the beta of Stock X? Round your answer to two decimal
places.
What is the beta of...

Historical Returns: Expected and Required Rates of Return
You have observed the following returns over time:
Year
Stock X
Stock Y
Market
2011
15%
14%
10%
2012
19
6
12
2013
-17
-3
-12
2014
3
2
3
2015
19
12
17
Assume that the risk-free rate is 6% and the market risk premium
is 6%. Do not round intermediate calculations.
What is the beta of Stock X? Round your answer to two decimal
places.
What is the beta of...

Historical Returns: Expected and Required Rates of Return
You have observed the following returns over time:
Year
Stock X
Stock Y
Market
2012
16%
15%
12%
2013
21
6
11
2014
-16
-6
-11
2015
3
3
1
2016
22
12
13
Assume that the risk-free rate is 4% and the market risk premium
is 7%. Do not round intermediate calculations.
What is the beta of Stock X? Round your answer to two decimal
places.
What is the beta of...

Historical Returns: Expected and Required Rates of Return
You have observed the following returns over time:
Year
Stock X
Stock Y
Market
2012
16%
12%
14%
2013
18
6
8
2014
-16
-4
-14
2015
5
2
3
2016
21
11
16
Assume that the risk-free rate is 6% and the market risk premium
is 6%. Do not round intermediate calculations.
What is the beta of Stock X? Round your answer to two decimal
places.
What is the beta of...

Historical Returns: Expected and Required Rates of Return
You have observed the following returns over time:
Year
Stock X
Stock Y
Market
2012
16%
14%
14%
2013
21
7
11
2014
-14
-3
-10
2015
5
2
1
2016
21
9
17
Assume that the risk-free rate is 3% and the market risk premium
is 6%. Do not round intermediate calculations.
What is the beta of Stock X? Round your answer to two decimal
places.
What is the beta of...

Problem 2-14
Historical Returns: Expected and Required Rates of Return
You have observed the following returns over time:
Year
Stock X
Stock Y
Market
2011
16%
12%
13%
2012
19
7
10
2013
-15
-2
-14
2014
4
1
1
2015
24
9
17
Assume that the risk-free rate is 4% and the market risk premium
is 7%. Do not round intermediate calculations.
What is the beta of Stock X? Round your answer to two decimal
places.
What is...

eBook
Problem 6-14
Historical Returns: Expected and Required Rates of Return
You have observed the following returns
over time:
Year
Stock X
Stock Y
Market
2012
14%
11%
11%
2013
17
7
11
2014
-13
-2
-11
2015
4
2
1
2016
21
8
15
Assume that the risk-free rate is 3%
and the market risk premium is 6%. Do not round intermediate
calculations.
What is the beta of Stock X? Round your
answer to two decimal places.
What is...

Problem 6-14
Historical Returns: Expected and Required Rates of Return
You have observed the following returns over time:
Year
Stock X
Stock Y
Market
2012
15%
12%
12%
2013
18
8
9
2014
-14
-3
-14
2015
4
1
1
2016
20
12
18
Assume that the risk-free rate is 3% and the market risk premium
is 7%. Do not round intermediate calculations.
What is the beta of Stock X? Round your answer to two decimal
places.
What is the...

Required Rate of Return
Stock R has a beta of 1.9, Stock S has a beta of 0.65, the
expected rate of return on an average stock is 12%, and the
risk-free rate is 4%. By how much does the required return on the
riskier stock exceed that on the less risky stock? Round your
answer to two decimal places.
Historical Returns: Expected and Required Rates of Return
You have observed the following returns over time:
Year
Stock X
Stock...

Problem 6-13
Historical Realized Rates of Return
Stocks A and B have the following historical returns:
Year
2012
-24.70%
-14.40%
2013
22.75
23.00
2014
11.75
37.10
2015
-2.50
-6.10
2016
31.50
-0.80
Assume that someone held a portfolio consisting of 50% of Stock
A and 50% of Stock B. What would have been the realized rate of
return on the portfolio in each year? What would have been the
average return on the portfolio during this period? Round your
answers...

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