You have observed the following returns over time:
Year Stock X Stock Y Market 2006 14% 13% 12% 2007 19 7 10 2008 16 5 12 2009 3 1 1 2010 20 11 15 Assume that the risk free rate is 6% and the market risk premium is 5%
a. what are the betas of stocks X and Y
b. What are the required rates of return on stocks X and Y
c. What is the required rate of return on a portfolio consisting of 80% of stock X and 20% of stock Y If stock X's expected return is 22%, is stock X under or overvalued?