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Calculating the Beta and Required Rate of Return

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You have observed the following returns over time. Assume that the risk free rate is 6% and the market risk premium is 5%.

Year Stock X Stock Y Market
2006 14% 13% 12%
2007 19% 7% 10%
2008 -16% -5% -12%
2009 3% 1% 1%
2010 20% 11% 15%

a. What are the betas for Stocks X and Y?
b. What are the required rates of return on Stocks X and Y?
c. What is the required rate of return on a portfolio consisting of 60% of Stock X and 40% of Stock Y?

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Solution Summary

Solution depicts the steps to estimate the betas and required rate of returns of the given stocks. Beta for each stock is calculated by using the suitable function in MS Excel.

Solution Preview

Please refer attached file for better understanding of formulas in MS Excel.

a. What are the betas for Stocks X and Y?
Beta can be found by using "SLOPE" function in MS Excel.
Beta of stock X=b1=1.35
Beta of stock ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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