Question

Expected and Required Rates of Return

You have observed the following returns over time:

Year	Stock X		Stock Y		Market
2015	14	%	14	%	10	%
2016	18		8		8
2017	-17		-5		-11
2018	5		2		3
2019	24		8		14

Assume that the risk-free rate is 5% and the market risk premium is 4%.

What are the betas of Stocks X and Y? Do not round intermediate calculations. Round your answers to two decimal places.

Stock X

Stock Y

What are the required rates of return on Stocks X and Y? Do not round intermediate calculations. Round your answers to two decimal places.

Stock X

Stock Y

What is the required rate of return on a portfolio consisting of 80% of Stock X and 20% of Stock Y? Do not round intermediate calculations. Round your answer to two decimal places.

Answer 1

Ans :-

Table of Calculation :-

	Returns(%)
X	Y	Market	X - X̅	(X - X̅)²	Y - Y̅	(Y - Y̅)²	M - M̅	(M - M̅)²	(X - X̅) - (M - M̅)	(Y - Y̅) - (M - M̅)
2015	14	14	10	5.2	27.04	8.6	73.96	5.2	27.04	27.04	44.72
2016	18	8	8	9.2	84.64	2.6	6.76	3.2	10.24	29.44	8.32
2017	-17	-5	-11	-25.8	665.64	-10.4	108.16	-15.8	249.64	407.64	164.32
2018	5	2	3	-3.8	14.44	-3.4	11.56	-1.8	3.24	6.84	6.12
2019	24	8	14	15.2	231.04	2.6	6.76	9.2	84.64	139.84	23.92
Total	44	27	24		1022.8		207.2		374.8	610.8	247.4
No. of Years	5	5	5
Avg Returns	8.8	5.4	4.8
	X̅	Y̅	M̅

Calculation Of Beta :-

Required Returns: -

Required return of the Portfolio :-

Working Notes :-