Problem: You have observed the following returns over time. Assume that the risk free rate is 6% and the market risk premium is 5%.
Year Stock X Stock Y Market
2006 14% 13% 12%
2007 19% 7% 10%
2008 -16% -5% -12%
2009 3% 1% 1%
2010 20% 11% 15%
Q1. What are the betas for Stocks X and Y?
Q2. What are the required rates of return on Stocks X and Y?
Q3. What is the required rate of return on a portfolio consisting of 60% of Stock X and 40% of Stock Y?