Question

# Problem 2-14 Historical Returns: Expected and Required Rates of Return You have observed the following returns...

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 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.
%

By Using Excel, The Beta is as follows

By Using Slope Function we can calculate Beta in Excel workbook

1. Beta of X = 1.25

2. Beta of Y = 0.43

3. Required Rate of Return of Stock X = Risk Free Rate + Beta * Market Risk Premium

Required Rate of Return of Stock X = 4% + 1.25 * 7%

Required Rate of Return of Stock X = 12.8%

4. Required Rate of Return of Stock Y = Risk Free Rate + Beta * Market Risk Premium

Required Rate of Return of Stock X = 4% + 0.43 * 7%

Required Rate of Return of Stock X = 7.0%

5. Portfolio return if weights are 80% stock X and 20% Stock Y

Portfolio Return = Weight * Return = 0.80 * 12.8% + 0.20 * 7.0% = 11.6%