1) Rodriguez Roofing's stock has beta of= 1.30, its required return is= 12.50%, and risk-free rate is= 4.00%. Determine the required rate of return on stock market?
2) Campbell's father holds only 1 stock, East Coast Bank (ECB), which he beleives is a very low-risk security. Campbell agrees that stock is comparatively safe, but he wishes to show that his father's risk would be even lower if he were more diversified. Campbell obtained following returns data shown for West Coast Bank (WCB). Both have had less variability than most other stocks over past five years. Measured by standard deviation of returns, by how much would his father's historical risk have been reduced if he had held the portfolio consisting of 60% ECB and the remainder in WCB?
Year ECB WCB
2008 20.00% 25.00%
2009 -10.00% 15.00%
2010 35.00% -5.00%
2011 -5.00% -10.00%
2012 15.00% 35.00%