Question

Assume the risk-free rate is 4.1% and expected market return is 10.2%. Suppose that you have observed the following returns over time:

Year	Stock A	Stock B	Market
2012	5%	14%	12%
2013	7%	15%	10%
2014	-9%	-17%	-12%
2015	1.5%	3%	1%
2016	10%	18%	15%
2017	17.5%	24.5%	20%

1. What are the betas of Stock A and Stock B?
2. What are the required rate of returns of Stocks A and B?
3. What is the required rate of return on a portfolio that consists of 60% of A and 40% of B?

Please show work in excel

Answer 1

Solution- ca) calculation of betas of Stocke A and stock B : Average retoan of Stock A = [5+7+(-9)+15+10+17-5]/6 -15-334 Average return of Stock B = {1415169} = [4+15+(-17) +3 +18+24:5]/6 = 9.584. Average return of Market - 512+10+(-12)+1+15+20] 16 -17.6771 A Return (b) Beta of stocke A = 5-33/7-67 = 0.69 Beta of Stock B = 9-5817.67 21-25 Required rate Rate of Stock A and stock B Stock A RA+B (Rm-Rp) = 4.1+0.69 [10.2-4.1] = 18.317. Stock B = 41+1-25[102-4.17 = 11.734. Required sradle of Portfolio Gomoilts 607.67 A and 107 B (c) Le partfolio Retuan = 0.60 (8.31) +0:40(11.73) =19.687.