You have observed the following returns over time:YearStock XStock YMarket201714%12%13%20182178.2019-13-7-1120202320212014Assume that the risk-free rate is 6% and the market risk premium is 5%.a. What are the betas of Stocks X and Y? Do not round intermediate calculations. Round youranswers to two decimal places.Stock X:Stock Y:b. 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:%c. What is the required rate of return on a portfolio consisting of 80% of Stock X and 20% of StockY? Do not round intermediate calculations. Round your answer to two decimal places.%

Given, The risk free rate is 6% Market risk premium is 5%

You have observed the following returns over time: Year Stock X Stock Y Market 2017 14% 12% 13% 2018 21 7 8 2019 -13 -7 -11 2020 3 2 3 2021 20 9 14 Assume that the risk-free rate is 6% and the market risk premium is 5%.

You have observed the following returns over time: Year Stock X Stock Y Market 2017 14% 12% 13% 2018 21 7 8 2019 -13 -7 -11 2020 3 2 3 2021 20 9 14 Assume that the risk-free rate is 6% and the market risk premium is 5%.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Concept explainers

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.

Question

You have observed the following returns over time:
Year
Stock X
Stock Y
Market
2017
14%
12%
13%
2018
21
7
8.
2019
-13
-7
-11
2020
2
3
2021
20
14
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? Do not round intermediate calculations. Round your
answers to two decimal places.
Stock X:
Stock Y:
b. 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:
%
c. 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.
%

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