Question

01 - Given the following returns on Stock J and "the market" during the last five years, what is the beta coefficient of Stock J?

                        Year    Stock J             Market

                        1          -13.85%          - 8.63%

                         2         22.90               12.37

                         3         35.15               19.37

                         4         12.48               5.73

                        5          5.25                 2.35

	A.	0.92
	B.	1.75
	C.	1.10
	D.	2.24
	E.	1.45

02 - Using the beta you get in the previous question, if the riskfree rate is 5%, the expected return on the market is 12%, when the equilibrium exists, what is the expected return of Stock J?

	A.	17.25%
	B.	12%
	C.	5%
	D.	0%
	E.	1%

Answer 1

Part 1:
Answer: Option B is correct.

Beta=Covariance(Stock returns,market returns)/Variance(Market Returns)
We will use this formula to calculate beta coefficient of stock J
Beta=1.749636089 or 1.75 (Rounded to two decimal places)

Part 2:
Answer: Option A is correct.

Expected return=Risk free rate +Beta*(Expected return on the market-Risk free rate)
Given that, risk free rate=5%, expected return on the market is 12% and beta is 1.75

Expected return of Stock J=5%+1.75*(12%-5%)
=0.05+1.75*(0.07)
=0.1725 or 17.25%