Historical Returns: Expected and Required Rates of Return You have observed the

Question

Historical Returns: Expected and Required Rates of Return You have observed the following returns over time:

Year Stock x Stock Y Market

2011 12% 14% 14%

2012 19% 7% 10%

2013 -17% -5% -14%

2014 4% 1% 2%

2015 22% 13% 18%

Assume that the risk-free rate is 6% and the market risk premium is 6%. Do not round intermediate calculations.

-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.

-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.

-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 one decimal place.

** Please show calculation steps**

Explanation / Answer

Year security X return market return Year security Y return market return 1 12 14 1 14 14 2 19 10 2 7 10 3 -17 -14 3 -5 -14 4 4 2 4 1 2 5 22 18 5 13 18 covariance between X and market 152 covariance between X and market 78.4 variance of market 160 variance of market 160 Beta of X covariance between X and market return 0.95 Beta of Y 0.49 required rate of return X IRF+(Rm-IRF)*beta 11.7 percent required rate of return Y IRF+(Rm-IRF)*beta 8.94 percent return on portfolio weight rate of return X 0.8 11.7 9.36 Y 0.2 8.94 1.788 required return on portfolio 11.148

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