Under the following conditions, what are the expected returns for stocks X and Y? $$\begin{array} { l l }
\lambda ^ { 0 } = 0.04 & b _ { x , 1 } = 1.2 \
k _ { 1 } = 0.035 & b _ { x , 2 } = 0.75 \
k _ { 2 } = 0.045 & b _ { y , 1 } = 0.65 \
& b _ { y , 2 } = 1.45
\end{array}$$
A)11.58% and 12.8%
B)15.65% and 18.23%
C)13.27% and 15.6%
D)18.2% and 16.45%
E)None of the above

Question

Under the following conditions, what are the expected returns for stocks X and Y? $$\begin{array} { l l } 
\lambda ^ { 0 } = 0.04 & b _ { x , 1 } = 1.2 \
k _ { 1 } = 0.035 & b _ { x , 2 } = 0.75 \
k _ { 2 } = 0.045 & b _ { y , 1 } = 0.65 \
& b _ { y , 2 } = 1.45
\end{array}$$
A)11.58% and 12.8%
B)15.65% and 18.23%
C)13.27% and 15.6%
D)18.2% and 16.45%
E)None of the above

Quizplus · Accepted Answer

The expected return for stock X is:E(R_X) = \lambda^0 + b_x,1 * k_1 + b_x,2 * k_2= 0.04 + 1.2 * 0.035 + 0.75 * 0.045= 0.1158 or 11.58%The expected return for stock Y is:E(R_Y) = \lambda^0 + b_y,1 * k_1 + b_y,2 * k_2= 0.04 + 0.65 * 0.035 + 1.45 * 0.045= 0.128 or 12.8%

Under the Following Conditions, What Are the Expected Returns for Stocks