Question

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 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.

1. 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.
   
   
2. 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.
   %
   
3. 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 to Question 1:

Riskier Stock:

Required Return = Risk-free Rate + Beta * (Market Return - Risk-free Rate)
Required Return = 4.00% + 1.90 * (12.00% - 4.00%)
Required Return = 4.00% + 1.90 * 8.00%
Required Return = 19.20%

Less Risky Stock:

Required Return = Risk-free Rate + Beta * (Market Return - Risk-free Rate)
Required Return = 4.00% + 0.65 * (12.00% - 4.00%)
Required Return = 4.00% + 0.65 * 8.00%
Required Return = 9.20%

Difference in Required Return = Required Return of Riskier Stock - Required Return of Less Risky Stock
Difference in Required Return = 19.20% - 9.20%
Difference in Required Return = 10.00%