Question: You have observed the following returns over time: Assume that the risk-free rate is 6% and the market risk premium is 5%. a. What are

You have observed the following returns over time:

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 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?

d. If Stock X's expected return is 22%, is Stock X under- or overvalued?

Market Stock X Stock Y Year 12% 2006 14% 13% 2007 19

Market Stock X Stock Y Year 12% 2006 14% 13% 2007 19 10 - 12 2008 -16 -5 2009 3 1. 2010 20 11 15

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