Question

Problem 6-14 Historical Returns: Expected and Required Rates of Return You have observed the following returns...

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.

  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.
    %

Homework Answers

Answer #1

1.
1.1107  

2.
0.5223

3.
10.7747%

4.
6.6559%

5.
=80%*10.7747%+20%*6.6559%=9.9509%

Year Stock X Stock Y Market X-Rf Y-Rf Market-Rf
2012 15% 12% 12% 12.00% 9.00% 9.00%
2013 18% 8% 9% 15.00% 5.00% 6.00%
2014 -14% -3% -14% -17.00% -6.00% -17.00%
2015 4% 1% 1% 1.00% -2.00% -2.00%
2016 20% 12% 18% 17.00% 9.00% 15.00%
Beta 1.1107 0.5223
Required rate of return 10.7747% 6.6559%
Required return on Portfolio 9.9509%
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