Year Stock X Stock Y Market 2009 14% 13% 12% 2010 19% 7% 10% 2011 -16% -5% -12%

Question

Year Stock X Stock Y Market
2009 14% 13% 12%
2010 19% 7% 10%
2011 -16% -5% -12%
2012 3% 1% 1%
2013 20% 11% 15%

Assume the risk free rate is 6% and the market premium is 5%

a. ) What are the betas of Stocks X and Y?

b.) What are the required rates of return on Stocks X and Y?

c.) What is the required rate of return on a portfolio consisting of 80% of stock X and 20% of stock Y

Explanation / Answer

Year Stock-X Stock-Y Market 80%/20% 2009 14 13 12 13.8 2010 19 7 10 16.6 2011 -16 -5 -12 -13.8 2012 3 1 1 2.6 2013 20 11 15 18.2 Beta=SD of the returns 15.017 7.403 b>RRR=Geometric Mean=4 Power root of the multiplication of the returns , -ve return is ignored b>RRR=Geometric Mean=4 Power root of the multiplication of the returns , -ve return is ignored 11.240 5.625 6.514 10.204

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