(a) What is meant by the term alpha? (b) Suppose the CAPM holds. A stock has a beta of 0.8. If the risk free-rate is 4% and the market risk premium is 6%, what is the expected return on this stock? (c) Now suppose that this stock is a preference share that is expected to pay a constant dividend of $7 per annum, in perpetuity. Using your answer in (b), and assuming that the CAPM is correct, what should the share price be? (d) If the observed share price is $85, is the stock over-valued or under-valued? (e) What is the alpha for this stock?

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Market Efficiency

Market efficiency refers to the market's ability to provide investors with all available information about investment options for buying and selling securities. Market efficiency reflects the true value of securities without undervaluing or overvaluing them. When the quality and quantity of information increase, the market becomes more efficient, allowing it to reduce arbitrage and obtain higher market returns from investment. In a well-functioning market, everyone receives all information completely and immediately at no cost. It opens up a plethora of opportunities for investors to access various investment options.