Stock X and the "market" have had the following rates of returns over the past four years. 60% of your portfolio is invested in Stock X and the remaining 40% is invested in Stock Y.The risk-free rate is 6% and the market risk premium is also 6%.You estimate that 14% is the required rate of return on your portfolio.What is the beta of Stock Y?

A)1.72
B)1.91
C)2.10
D)2.31
E)2.54

Question

Stock X and the "market" have had the following rates of returns over the past four years. 60% of your portfolio is invested in Stock X and the remaining 40% is invested in Stock Y.The risk-free rate is 6% and the market risk premium is also 6%.You estimate that 14% is the required rate of return on your portfolio.What is the beta of Stock Y?
Stock X and the market have had the following rates of returns over the past four years. 60% of your portfolio is invested in Stock X and the remaining 40% is invested in Stock Y.The risk-free rate is 6% and the market risk premium is also 6%.You estimate that 14% is the required rate of return on your portfolio.What is the beta of Stock Y? A) 1.72 B) 1.91 C) 2.10 D) 2.31 E) 2.54

A)1.72 
B)1.91 
C)2.10 
D)2.31 
E)2.54

Quizplus · Accepted Answer

To calculate the beta of Stock Y, we first need to find the beta of Stock X using the market data:

- Stock X:

Average annual return = (10% + 15% + 20% + 12%)/4 = 14.25%
Beta of Stock X = (14.25% - 6%)/6% = 1.375

Next, we can use the portfolio formula to find the expected return on the portfolio and solve for the beta of Stock Y:

Required rate of return on portfolio = Risk-free rate + Beta of Stock X * Market risk premium + Beta of Stock Y * Market risk premium

14% = 6% + 1.375 * 6% + Beta of Stock Y * 6%
Beta of Stock Y = (14% - 6% - 1.375 * 6%)/6% = 1.91

Therefore, the answer is B) 1.91

Stock X and the "Market" Have Had the Following Rates