Evaluating risk and return Stock X has a 10.5% expected return, a beta coefficie

Question

Evaluating risk and return

Stock X has a 10.5% expected return, a beta coefficient of 1.0, and a 35% standard deviation of expected returns. Stock Y has a 12.5% expected return, a beta coefficient of 1.2, 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.

CVx = ________
CVy = ________


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


Calculate the required return of a portfolio that has $9,000 invested in Stock X and $3,500 invested in Stock Y. Round your answer to two decimal places.
rp = _____ %

Explanation / Answer

1) CVX = 35/10.5 = 3.33

    CVY = 25/12.5 = 2

2) rx = 6 +5(1) = 11%

     ry = 6 + 5(1.2) = 12%

3) b = (9000/12500)(1) + (3500/12500)(1.2)

       = 1.056

   required rate of return = 6 + 5(1.056) = 11.28%

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