You have observed the following returns over time for Eastman Chemical Bonding (

Question

You have observed the following returns over time for Eastman Chemical Bonding (ECB) and Wilder's Creations and Buildings (WCB). Assume that the risk-free rate is 6% and the market risk premium is 5%.

Year                  ECB              WCB              Market

2011              40.00% 40.00% 35%

2012               10.00% 15.00% 10%

2013 35.00% 5.00% 30%

2014               5.00% 10.00% -10%

2015 15.00% 35.00% 25%

Please Show Work:

The beta of stock ECB is: (Choices are 1.15,1.07,1.20,1.00,1.17)

The beta of stock WCB is: (Choices are 0.99,0.77,0.92,0.95,0.84)

The required rate of return on stocks ECB is: (Choices are 9.85%,11.35%,10.25%,11.25%,11.00%)

The required rate of return on stocks WCB is: (Choices are 9.85%,11.35%,10.25%,11.25%,11.00%)

The required rate of return on a portfolio consisting of 80% of stock ECB and 20% of stock WCB is: (Choices are 11.05%,9.50%,11.75%,10.25%,10.85%)

Explanation / Answer

Beta can be calculated in excel using SLOPE function

Beta for ECB = SLOPE(ECB values, Market values) = 1.07 and similarly for WCB

Required Return = Rf + beta x MRP

For ECB, Returns = 6% + 1.07 x 5% = 11.35% and for WCB = 6% + 0.77 x 5% = 9.85%

For Portfolio, Returns = 80% x 11.35% + 20% x 9.85% = 11.05%

ECB WCB Market 2011    40.00% 40.00% 35% 2012    -10.00% 15.00% 10% 2013 35.00% -5.00% 30% 2014    -5.00% -10.00% -10% 2015 15.00% 35.00% 25% Beta 1.07 0.77 Returns 11.35% 9.85% Portfolio 11.05%

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