Solution

(2-14) Historical Returns: Expected and Required Rates of Return You have observed the following returns over time: Year 2017 2018 2019 2020 2021 Stock X 14% 19 -16 3 20 Stock Y 13% 7 -5 1 11 Market 12% 10 -12 1 15 Assume that the risk-free rate is 6% and the market risk premium is 5%. a. What are the betas of Stocks X and Y? HIDE ANSWER Answer: bx 1.3471 ; by = 0.6508 b. What are the required rates of return on Stocks X and Y? HIDE ANSWER e Answer: 12.7355% ; ry 9.254% . c. What is the required rate of return on a portfolio consisting of 80% of Stock X and 20% of Stock Y?