Question

Historical Returns: Expected and Required Rates of Return You have observed the following returns over time: Market Stock Y 13% 11% Year 2014 2015 2016 2017 2018 Stock X 13% 18 -15 10 -10 Assume that the risk-free rate is 7% and the market risk premium is 5%. a. 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 round 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

YEAR Average Return Xx-X [Given reture Average return = dx | 13 8.4 4. 6 18 8.4 9.6 8.4 - 23.4 1-5.4 23 8.4 8.4 14.6 Return 1 3 I 6 2014 2015 2016 2017 1 -4 8.4 2018 42 2x mitteplied by YEAR M IM-M Average lawer Меди doz dxdm dyardm Ketven dem I 11 5.4 5.4 10 I 2014 2015 2016 I 2017 soy -10 3 13 5.6 1 4.6 -15.4 -2.4 | 7.6 31.36 72.8 2101682.8 237.16 360.36 5.76 12.96 57.76 1110.96 44.8 4.6 13806 9.6 30.4 5.4 5-4 2018 27 1353.2 1639.88 228 Wow, Coverance (x,xn) = (dx*dm) = 639.88_ )127.98 n Kevadiance [YM] = {bykdo) 24 = 4506 vertance (m) - Eld m?) » 33.2 - 70.64 W

ca = 1. 81 Beta of X - Covariance (X, 1) Varouce (M) = 127.98 70.64 Betoof != Covariance (Y,0) = 4506 = 0.645 or Vasconce (M) 70.64 10.65 (b) _ formula to be used > Expected Return= R6 + Betal Rm-REJ Given, Rick free nate [RE] = 7% Tarket Risk fremsum ta] = 5% [hm=Rf] 1 Peta of x = 1.81 Peta of Y = 0.65 Required betwee of X = 7+ 1.8185) = Mequired Ineture of Y = 7 +(0.6585) - 16.05% 10.25.76 ] Relturn of x = 16.05% & Return of y= 10.25% | Weight x = 0.80_ j weight Y = 0.20 hequred lieture of Vestfolio = ( Retura X * WeightX) +Return Y * weighty) = (16.05 x 0.80) + (10.25X0-20) = 12.84 + 2.05 = 14.896
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