Computation of required return of a portfolio and risk factor analysis
Stock X has a 10% expected return, a beta coefficient of 0.9, and a 35% standard deviation of expected returns. Stock Y has a 12.5% expected return, a beta coefficient of 1.2, and a 25% standard deviation. The risk-free rate is 6%, and the market risk premium is 5%.
a) Calculate the required return of a portfolio that has $7500 invested in Stock X and $2500 invested in Stock Y.
b) If the market risk premium increase to 6%, which of the two stocks would have the larger increase in its required return?