Problem 6-14
Historical Returns: Expected and Required Rates of Return
You have observed the following returns over time:
(a) and (b)
(c) Risk-Free Rate = Rf = 3 % and Market Risk Premium (MRP) = 6 %
Expected Return = Rf + Beta of X x MRP = 3 + 1.26 x 6 = 10.56 %
(d) Risk-Free Rate = Rf = 3 % and Market Risk Premium (MRP) = 6 %
Expected Return = Rf + Beta of Y x MRP = 3 + 0.53 x 6 = 6.18 %
(e) Portfolio Weight of X = 80 % or 0.8 and Portfolio Weight of Y = 20 % or 0.2
Required Return on Portfolio = 0.8 x 10.56 + 0.2 x 6.18 = 9.684 %
Problem 6-14 Historical Returns: Expected and Required Rates of Return You have observed the following returns...
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