Assume the following inputs for parts a, b, and c below. The market portfolio has an expected
Question:
Assume the following inputs for parts a, b, and c below. The market portfolio has an expected return of 12% and a standard deviation of returns of 20%. The risk-free rate is 5%.
a) The stock ABC has a standard deviation of 50%. Its correlation with the market is 0.5. What is the expected rate of return for ABC as per CAPM?
b) You estimate ABC to go up from $40 to $48 over the next year. Calculate the alpha for the stock and assess if ABC is over- or under- priced according to CAPM?
c) Suppose CAPM holds. A stock XYZ has an expected return of 10% and a standard deviation of returns of 50%. What fraction of the XYZ stock's variance represents unsystematic risk?
Corporate Finance
ISBN: 9780077173630
3rd Edition
Authors: David Hillier, Stephen A. Ross, Randolph W. Westerfield, Bradford D. Jordan, Jeffrey F. Jaffe