You have observed the following returns over time:
Year Stock X Stock Y Market
2004 14% 13% 12%
2005 19 7 10
2006 -16 -5 -12
2007 3 1 1
2008 20 11 15
Assume the risk-free rate is 6% and the market risk premium is 5%.
a. What are the betas of stocks X and Y?
b. What are the required rates of return for Stocks X and Y?
c. What is the required rate of return for a portfolio consisting of 80% of Stock X and 20% of Stock Y?