You have observed the following returns over time: Year Stock X Stock Y Market 2

Question

You have observed the following returns over time:

Year Stock X Stock Y Market
2006   14%        13%   12%
2007    19           7          10
2008 -16         -5        -12
2009      3          1           1  
2010      20       11          15
           Assume that the risk-free rate is 6% and the market risk premiumiiiiiX and stock Y?


         



b.What is the required rate of return on Stock X? Round your answer to two decimal places.
%iiiiii

What is the required rate of return on Stock Y? Round your answer to two decimal places.



c.What is the required rate of return on a portfolio consisting of 80% of Stock X and 20% of Stock Y? Round your answer to two decimal places.
%
iiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiiii

            d.If Stock X's expected return is 22%, is Stock X under- or overvalued?

Explanation / Answer

1.(a)Stock X required rate of return=8.00%

(b)Stock Y required rate of return=5.4%

(c)required return rate of portfolio=0.8*8+0.2*5.4=7.48%

(d)22% is definitely overvalued

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