Expected and Required Rates of Return
(6-13): Historical Returns: Expected and Required Rates of Return
You have observed the following returns over time:
Year Stock X Stock Y Market
2003 14% 13% 12%
2004 19 7 10
2005 216 25 212
2006 3 1 1
2007 20 11 15
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?
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?
d. If Stock X’s expected return is 22%, is Stock X under- or overvalued? Solution Summary
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