Question

Excel Online Structured Activity: Historical Return: Expected and Required Rates of Return

You have observed the following returns over time:

Year	Stock X		Stock Y		Market
2011	15	%	12	%	11	%
2012	19		6		11
2013	-16		-6		-11
2014	2		1		2
2015	23		8		16

Assume that the risk-free rate is 4% and the market risk premium is 6%.

1. What is the beta of Stock X? Do not round intermediate calculations. Round your answer to two decimal places.

   What is the beta of Stock Y? Do not round intermediate calculations. Round your answer to two decimal places.

2. What is the required rate of return on Stock X? Do not round intermediate calculations. Round your answer to one decimal place.

   %

   What is the required rate of return on Stock Y? Do not round intermediate calculations. 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? Do not round intermediate calculations. Round your answer to one decimal place.

   %

Answer 1

USING EXCEL FORMULA TO CALCULATE BETA

	You have observed the following returns over time:
	A	B	C	D
1	Year	Stock X	Stock Y	Market
2	2011	15%	12%	11%
3	2012	19%	6%	11%
4	2013	-16%	-6%	-11%
5	2014	2%	1%	2%
6	2015	23%	8%	16%
	Beta	1.478891821	0.598504837
	EXCEL FORMULA	SLOPE(B2:B6,D2:6)	SLOPE(C2:C6,D2:6)

Beta of Stock X =1.48
Beta of Stock Y =0.60

b. Required rate of X =Risk free rate+Beta*(Market Return -Risk free Rate) =4%+ 1.478891821*6% =12.8733% or 12.9%
Required rate of Y =Risk free rate+Beta*(Market Return -Risk free Rate) =4%+ 0.598504837*6% =7.591% or 7.60%

c. Required rate of return of portfolio =80%*12.8733%+20%*7.591% =11.8%