You have observed the following returns over time: Year Stock X Stock Y Market 2011 14% 12% 12%...

Question:

You have observed the following returns over time:

Year Stock X Stock Y Market
2011 14% 12% 12%
2012 20 6 8
2013 -17 -2 -13
2014 3 2 2
2015 19 11 12

Assume that the risk-free rate is 3% and the market risk premium is 6. Do not round intermediate calculations.

a. What is the beta of Stock X?

What is the beta of Stock Y?

b. What is the required rate of return on Stock X?

What is the required rate of return on Stock Y?

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

Beta of a Stock:

Beta of a stock represent how the stock moves with respect to the market. A stock that moves faster than the market has a beta greater than 1 and a stock that moves relatively slower than the market has a beta less than 1.

Answer and Explanation:

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We will calculate the average returns for stock X and Y; variance of stock X, stock Y and market; and covariance of stock X and Y with market M to...

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Portfolio Weight, Return & Variance: Definition & Examples

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Chapter 12 / Lesson 1
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A portfolio can be designed in several different ways. It is important to understand the basics of a portfolio before building and managing one. In this lesson, we will go over the weight, return, and variance of a portfolio.


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