Question

8. Pepcico Inc. has a beta of 0.59. The risk-free rate is 2% and the market risk premium is 8%. What is the required rate of return of Pepcico? Round to the nearset hundredth percent. Answer in the percent format. Do not include % sign in your answer (i.e. If your answer is 4.33%, type 4.33 without a % sign at the end.)

7.

You are composing a two-stock portfolio consisting of 40 percent Stock X and 60 percent Stock Y. Given the following information, find the standard deviation of this portfolio.

Company	Beta	Expected Return	Variance	Correlation Coefficient
X	1.4	28%	0.30	CORRX,Y = 0.3
Y	2.4	12%	0.16

Round to the nearset hundredth percent. Answer in the percent format. Do not include % sign in your answer (i.e. If your answer is 4.33%, type 4.33 without a % sign at the end.)

Answer 1

8)		6.72%
Working:
As per Capital Asset Pricing Model,
Requirde rate of return	=	Risk free rate	+	Beta	*	Market risk premium
	=	2%	+	0.59	*	8%
	=	6.72%
7)		37.11%
Working:
# 1: Standard deviation of Stock X and Stock Y
Standard deviation of:
Stock X	=	Variance	^(1/2)	=	0.30	^(1/2)	=	0.55
Stock Y	=	Variance	^(1/2)	=	0.16	^(1/2)	=	0.40
# 2: Standard deviation of portfolio
Standard deviation of portfolio	=	((Wx)^2*(SDx)^2+(Wy)^2*(Sdy)^2+2.Wx*Wy*SDx*Sdy*CORRX,Y)^(1/2)
	=	((0.40)^2*(0.55)^2+(0.60)^2*(0.40)^2+2*0.40*0.60*0.55*0.40*0.3)^(1/2)
	=	37.11%
Where,
Wx	=	Weight of X
SDx	=	Standard eviation of X
Wy	=	Weight of Y
Sdy	=	Standard eviation of Y