Historical Returns: Expected and Required Rates of Return You have observed the following returns over time: Year Stock X Stock Y Market 2012 14% 12% 12% 2013 17 8 10 2014 -16 -8 -12 2015 3 2 2 2016 22 12 13 Assume that the risk-free rate is 6% and the market risk premium is 7%. 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. %
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Problem 6-14
Historical Returns: Expected and Required
You have observed the following returns over time:
| Year | Stock X | Stock Y | Market |
| 2012 | 14% | 12% | 12% |
| 2013 | 17 | 8 | 10 |
| 2014 | -16 | -8 | -12 |
| 2015 | 3 | 2 | 2 |
| 2016 | 22 | 12 | 13 |
Assume that the risk-free rate is 6% and the market risk premium is 7%. 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.
%
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