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4. (15 pts) You have observed the following returns over time:
Year Stock X
Stock Y Market
13% 12% 7 10 -5 -12 1 1
11 15
Assume that the risk-free rate is 6 percent and the market return is 11 percent. There is an equal probability for each observation to occur (.2 for each).
A. Calculate the betas of stock X and Y? Also calculate the beta of the market?
B. What are the required rates of return for stock X and Y?
C. What is the required rate of return and beta for a portfolio consisting of 80 percent of Stock X and 20 percent of Stock Y?
D. If Stock X=s expected return is 22 percent, is Stock X under- or overvalued?
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