Question

2-7: The Relationship between Risk and Return in the Capital Asset Pricing Model Problem 2-14 Historical Returns: Expected and required Rates of Return You have observed the following returns over time: Year Stock X Stock Y Market 2011 13% 13% 2012 2013 2014 2015 Assume that the risk-free rate is 6% and the market risk premium is 6%. Do not round Intermediate calculations. a. What is the beta of Stock X? Round your answer to two decimal places What is the beta of Stock Y? Round your answer to two decimal places. b. What is the required rate of return on Stock X? Round your answer to one decimal place. What is the required rate of return on Stock Y? Round your answer to one decimal place. c. What is the required rate of return on a portfolio consisting of 80% of Stock Xand 20% of Stock Y7 Round your answer to one decimal place.

Answer 1

a.

n Meon -RER 7

Meam Stock 15 t13 18 +5 +18 35 5 : 1 8 1. S Meam Shek y 13+ 13 29 s.8% S $ Meam of market 13+8- 1o +a t17 30 5

Mank el () tock x(n) tckys) 1.8) 6 13 Yrs 5o, 51.81 45 7.2 Q011 224 125- 2 11.2 19 2012 ho 519 256 -6 -25.2 -10 -18 2013 11,2 .4 16 4 2 -2-8 2014 1334 12 10M.04 13 10.2 12 201S 6303 g54 8 39 Van (Manket) E(9- u 29.2 2 Lovtmace Cov(stouk x, Monket) (-ny g4 28 630 2 134.0 446 CON(stoch x, manuet) 134.01,50 Var(morvet) beto Stock X 89.2 2-2(y-(-2)(y-5) Z-N CE5.8) -6) s stocy(2) Moke () 50.4 44 51.84 13 72 2011 13 2.4 1५५ . 2 2 a o12 2 s6 139.24 -I.8 -16 2013 -6 -1o 14.44 -3.8 2o11 1S-2 2 2 - $1.34 12 1 79-2 33C 1 2 I1 12 2015 2 58.8 Var(Mannet) -5 ,89.2 Cov (stork Y, Maae n-y), 33 , 63 2 heta ot steck Y ov(steky, Honleet) Voo (Hoshel) 63.2 0-75 89 2 -1

b Cat cut ationf Requrad ate o retom Re R (Rm- R)xA (Rm-R)Risk Premium R6 S to ck X Required ta of tctum Re RtRm-R) C. + 1S 6+9 IS/. ehm o Sthck Y (Rm- Rf)B Requircd ati Re Rf x0 75 + +45 to S portialio c) Required Jtati of etun on Sthck y% Civem stck 80% Reqwrrd ale ofreton of Potfolio is y x0.8 t lo.5 xo.2 127 2.1. 4.17