Question

Historical Returns: Expected and Required Rates of Return Year You have observed the following returns over time: Stock X Stock y Market 2014 12 11 13% 2015 2016 -16 2017 10 12 2018 Assume that the risk-free rate is 5% and the market risk premium is 4% 3. What are the betas of stocks X and Y? Do not round Intermediate calculations. Round your answers to two decimal places Stock X: Stock Y: b. What are the required rates of return on Stocks X and Y? Do not found intermediate calculations. Round your answers to two decimal places Stock X: Stock Y c. 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 two decimal places

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

A C D E Stock Y Year 2014 2015 11% Stock X 12% 7% -16% 2% 19% Market 13% 10% -14% 5% 2016 -4% 3% 10% 2017 2018 2% 12% Risk free rate Market Risk Premium 12 a Beta 13 Stock X Stock Y 1.13 0.51 14 15 16 17 18 b. Stock X Stock Y Required Rate 9.51% 7.05% Stock X Stock Y Weight 80.00% 20.00% Beta of Portfolio 1.0041 Required return of Portfolio 9.02%

Cell reference -

A B C D E Year Stock X 2014 2015 2016 2017 2018 0.12 0.07 -0.16 0.02 0.19 Stock y 0.11 0.05 -0.04 0.03 0.1 Market 0.13 0.1 -0.14 0.02 0.12 Risk free rate Market Risk Premium 0.05 0.04 12 a. Stock X Stock Y Beta =SLOPE(C3:C7,E3:E7) =SLOPE(D3:07,E3:E7) 14 O PENSIOEC2 aa a Ja 16 b. Required Rate 17 Stock x =C9+C13*c10 Stock Y =C9+C14*C10 19 20 C. Weight 21 Stock X 0.8 Stock Y 0.2 23 Beta of Portfolio =C13*C21+C14*C22 25 Required return of Portfolio =C9+C24*C10 27 22

Hope it will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.