Homework SourseRFR is 41 EMR 105 Year Stock A Stock B Market 2012 5 14 12 2
RFR is 4.1% EMR= 10.5
Year
Stock A
Stock B
Market
2012
5%
14%
12%
2013
7%
15%
10%
2014
-9%
-17%
-12%
2015
1.5%
3%
1%
2016
10%
18%
15%
2017
17.5%
24.5%
20%
RFR = Risk Free Rate, EMR = Expected Market Return, RRR = Required Rate of Return
Find Betas of Stock A & B
Find RRR of stock A & B
Find RRR for portfolio that consists of 40% of A and 60% of B?
| Year | Stock A | Stock B | Market |
| 2012 | 5% | 14% | 12% |
| 2013 | 7% | 15% | 10% |
| 2014 | -9% | -17% | -12% |
| 2015 | 1.5% | 3% | 1% |
| 2016 | 10% | 18% | 15% |
| 2017 | 17.5% | 24.5% | 20% |
Solution
Beta = covarinace/(standard dev of Makret ^2)
covariance can be found using cov.s and stadard deviation through stdev.s in Excel
b. required return of A = 4.1% + 0.75*(10.5 - 4.1)% = 8.90%
requird return for B = 4.1% + 1.28*(10.5 - 4.1)% = 12.29%
c. RRR of portfolio = 0.4*8.9% + 0.6*12.29% = 10.94%
| A | B | Market | |
| 1 | 5.00% | 14.00% | 12.00% |
| 2 | 7.00% | 15.00% | 10.00% |
| 3 | -9.00% | -17.00% | -12.00% |
| 4 | 1.50% | 3.00% | 1.00% |
| 5 | 10.00% | 18.00% | 15.00% |
| 6 | 17.50% | 24.50% | 20.00% |
| standard dev | 8.86% | 14.78% | 11.50% |
| Average | 5.33% | 9.58% | 7.67% |
| covariance | 0.0099 | 0.0169 | 0.01323 |
| beta | 0.75 | 1.28 | 1.00 |
