You have observed the following returns over time: Assume that the risk-free rate is 6 percent and

Question:

You have observed the following returns over time:

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?

Year Stock X Stock Y Market 14% 13% 2000 12% 2001 19 10 2002 -5 -12 -16 2003 2004 20 11 15

Stocks
Stocks or shares are generally equity instruments that provide the largest source of raising funds in any public or private listed company's. The instruments are issued on a stock exchange from where a large number of general public who are willing... Expected Return
The expected return is the profit or loss an investor anticipates on an investment that has known or anticipated rates of return (RoR). It is calculated by multiplying potential outcomes by the chances of them occurring and then totaling these... Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...