Problem
Historical Returns: Expected and Required Rates of Return
You have observed the following returns over time:
|
Year
|
Stock X
|
Stock Y
|
Market
|
|
2015
|
15%
|
14%
|
11%
|
|
2016
|
21
|
7
|
10
|
|
2017
|
-12
|
-6
|
-10
|
|
2018
|
4
|
2
|
1
|
|
2019
|
21
|
11
|
12
|
Assume that the risk-free rate is 5% and the market risk premium is 3%.
a) What are the betas of Stocks X and Y?
b) What are the required rates of return on Stocks X and Y?
c) What is the required rate of return on a portfolio consisting of 80% of Stock X and 20% of Stock Y?