Under the following conditions, what are the expected returns for stocks X and Y?

$\begin{array}{ll}
\lambda^{0}=0.05 & b_{x, 1}=0.90 \
k_{1}=0.03 & b_{x, 2}=1.60 \
k_{2}=0.04 & b_{y, 1}=1.50 \
& b_{y, 2}=0.85
\end{array}$

A) 14.1% and 12.9%
B) 12.5% and 19.5%
C) 19.5% and 18.5%
D) 21.2% and 18.5%
E) None of the above

Question

Under the following conditions, what are the expected returns for stocks X and Y?

$\begin{array}{ll}
\lambda^{0}=0.05 & b_{x, 1}=0.90 \
k_{1}=0.03 & b_{x, 2}=1.60 \
k_{2}=0.04 & b_{y, 1}=1.50 \
& b_{y, 2}=0.85
\end{array}$

A) 14.1% and 12.9%
B) 12.5% and 19.5%
C) 19.5% and 18.5%
D) 21.2% and 18.5%
E) None of the above

Quizplus · Accepted Answer

The expected return for stock X is:$E(R_x) = \lambda^0 + b_{x,1}k_1 + b_{x,2}k_2 = 0.05 + 0.90(0.03) + 1.60(0.04) = 0.141$The expected return for stock Y is:$E(R_y) = \lambda^0 + b_{y,1}k_1 + b_{y,2}k_2 = 0.05 + 1.50(0.03) + 0.85(0.04) = 0.129$

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