Question

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.

1. What is the beta of Stock X? Round your answer to two decimal places.
   
   
2. What is the beta of Stock Y? Round your answer to two decimal places.
   
   
3. What is the required rate of return on Stock X? Round your answer to one decimal place.
   %
   
4. What is the required rate of return on Stock Y? Round your answer to one decimal place.
   %
   
5. 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

Answer :

(a.) Calculation of Beta of Stock X :1.30

(b.) Calculation of Beta of Stock Y : 0.54

Below is the sheet referred showing Beta Calculation :

(c.) Required Return od Stock X = Risk Free Rate + (Beta * Market Risk Premium)

= 3% + (1.30 * 6%)

= 10.8%

(d.) Required Return od Stock Y = Risk Free Rate + (Beta * Market Risk Premium)

= 3% + (0.54 * 6%)

= 6.3%

(e.) Required Return on a portfolio consisting of 80% of Stock X and 20% of Stock Y :

Required Return = (0.80 * 10.8%) + (0.20 * 6.3%)

= 9.9%