# Expected and Required Rates of Return

(6-13): Historical Returns: Expected and Required Rates of Return

You have observed the following returns over time:

Year Stock X Stock Y Market

2003 14% 13% 12%

2004 19 7 10

2005 216 25 212

2006 3 1 1

2007 20 11 15

Assume that the risk-free rate is 6% and the market risk premium is 5%.

a. What are the betas of Stocks X and Y?

b. What are the required rates of return for Stocks X and Y?

c. What is the required rate of return for a portfolio consisting of 80% of Stock X

and 20% of Stock Y?

d. If Stock X's expected return is 22%, is Stock X under- or overvalued?

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#### Solution Summary

The solution explains how to calculate the expected and required rates of return.

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