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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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
Transcribed Image Text: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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