Stock X has a 9.5% expected return, a beta coefficient of 1.0, and a 40% standar

Question

Stock X has a 9.5% expected return, a beta coefficient of 1.0, and a 40% standard deviation of expected returns. Stock Y has a 13.0% expected return, a beta coefficient of 1.3, and a 25.0% standard deviation. The risk-free rate is 6%, and the market risk premium is 5%.

Calculate each stock's coefficient of variation. Round your answers to two decimal places.
a. CVx =
b. CVy =

Calculate each stock's required rate of return. Round your answers to two decimal places.
d. rx =_______ %
e. ry = _______%

Calculate the required return of a portfolio that has $4,500 invested in Stock X and $6,500 invested in Stock Y. Round your answer to two decimal places.
g. rp =_______________ %

Explanation / Answer

a.       Coefficient of variance = Standard deviation/Expected return For Stock X has a 9.5% expected return. Standard deivation is 40% = 0.4       Coefficient of variance   = 0.4/0.095                                                  =4.21 Therefore CVx   = 4.21 b. For Stock Y has a 13.0% expected return and S.D is 25% Coefficient of variance is = 0.25/0.13                                             = 1.92 Therefore CVy = 1.92 d. Form Capital asset pricing model(CAPM), Required rate of return = Rf + Rm*Beta of the stock                   Here, Rf is risk-free rate                              Rm is required rate of return Risk-free rate is 6%, Market risk premium is 5%. For stock X Beta is 1.0                               Required rate of return is = 6% + 5%*1.0                                                                            = 11% rx   = 11% e.    For stock Y the beat value is 1.3.                            Required rate of return is = 6%+5%*1.3                                                                         = 6% +6.5%                                                                         = 12.5% ry = 12.5%

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