Response to the following problem:
You have observed the following returns over time:
|
Year
|
Stock X
|
Stock Y
|
Market
|
|
2002
|
14%
|
13%
|
12%
|
|
2003
|
19
|
7
|
10
|
|
2004
|
-16
|
-5
|
-12
|
|
2005
|
3
|
1
|
1
|
|
2006
|
20
|
11
|
15
|
Assume that the risk-free rate is 6 percent and the market risk premium is 5 percent.
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 percent of Stock X and 20 percent of Stock Y?
d. If Stock X's expected return is 22 percent, is Stock X under- or overvalued?