Stock X, Stock Y, and the market have had the following returns over the past four years. Year 2018 Market 11% Y 12% 10% 2019 7 4 -3 2020 17 12 21 2021 -3 -2 -5 The risk-free rate is 7 percent. The market risk premium is 5 percent. What is the required rate of return for a portfolio that consists of $14,000 invested in Stock x and $6,000 invested in Stock Y?
Stock X, Stock Y, and the market have had the following returns over the past four years. Year 2018 Market 11% Y 12% 10% 2019 7 4 -3 2020 17 12 21 2021 -3 -2 -5 The risk-free rate is 7 percent. The market risk premium is 5 percent. What is the required rate of return for a portfolio that consists of $14,000 invested in Stock x and $6,000 invested in Stock Y?
Chapter8: Risk And Rates Of Return
Section: Chapter Questions
Problem 8PROB
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Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Question
Transcribed Image Text:Stock X, Stock Y, and the market have had the following returns over
the past four years.
Year
2018
Market
Y
11%
10%
12%
2019
7
4
-3
2020
17
12
21
2021
-3
-2
-5
The risk-free rate is 7 percent.
What is the required rate of return for a portfolio that consists of
The market risk premium is 5 percent.
$14,000 invested in Stock X and $6,000 invested in Stock Y?
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