Question

Stocks A and B had the following returns:

What was the standard deviation of each stock?

Y ear	Stock A	Stock B
1	9%	6%
2	12%	8%
3	-4%	-1%
4	1%	5%

A.	Stock A: 0.073, Stock B: 0.039;
B.	Stock A: 0.037, Stock B: 0.039;
C.	Stock A: 0.073, Stock B: 0.052;
D.	Stock A: 0.073, Stock B: 0.073;

You have learned that the beta of A is 1.3 while the beta of B is 0.5. The risk-free rate is 3%.What are the required rate of returns (RRR) of A and B if the expected return to the market is 10%?(hint: CAMP formula)

	A.	Stock A: 12.1%, Stock: 6.5%;
	B.	Stock A: 16%, Stock: 8%;
	C.	Stock A: 16%, Stock: 6.5%;
	D.	Stock A: 13%, Stock: 8%;

Answer 1

Ans 1)

A.	Stock A: 0.073, Stock B: 0.039

	Stock A (X)	Stock B (Y)		(X -Average Return of X)^2	(Y -Average Return of Y)^2
Year 1	9	6		20.25	2.25
Year 2	12	8		56.25	12.25
Year 3	-4	-1		72.25	30.25
Year 4	1	5		12.25	0.25
Total	18	18		161.00	45.00
Average Return =	Total Return / NO of years
	18 / 4	18 / 4
	4.50	4.50
Standard Deviation =	Square root of [((X -Average Return of X)^2) / (n -1 )]	Square root of [((Y -Average Return of Y)^2) / (n -1 )]
	Square root of (161 / 3)	Square root of (45 / 3)
	0.073	0.039

ANS 2)

A.	Stock A: 12.1%, Stock: 6.5%

STOCK A
CAPM Return =	Risk free Return + (Market Return - Risk free return)* Beta
CAPM Return =	3% + (10% - 3%) * 1.3
CAPM Return =	12.1%
STOCK B
CAPM Return =	Risk free Return + (Market Return - Risk free return)* Beta
CAPM Return =	3% + (10% - 3%) * 0.5
CAPM Return =	6.5%