Security analyst Jo identified three potential securities A, B and C for investment. The market portfolio M provides 12% pa return and risk-free return (rf) is 4% pa. In the following chart Jo draws the securities market line and identifies the relative positions of these three securities. Using the data given on the chart below identify the security which will give you maximum abnormal return (alpha). Explain your answer with reasons. 

 

Transcribed Image Text:

Expected Return (%) 20 18 16 14 12 10 6 0 rf 0.5 A Security Market Line 1 B ● M 1.5 2 C 2.5 Expected Return (%) 20 18 16 14 12 10 6 0 rf 0.5 A Security Market Line 1 B ● M 1.5 2 C 2.5

Answer rating: 100% (QA)

CAPM return Rf beta RmRf Rf riskfree rate Rm market return alpha ... View the full answer