It is November 2019. The following variance -covariance matrix, for the market (S&P 500) and stocks T and U, is based on monthly data from November 2014 to October 2019. Assume T and U are included in the S&P 500. The betas for T and U are T = 0.727 and U = 0.75. S&P500 T U S&P500 0.0256 0.0186 0.0192 T 0.0186 0.1225 0.0262 U 0.0192 0.0262 0.0900 Average monthly risk premiums from 2014 to 2019 were: S&P500 : 1.0% T : 0.6% U : 1.1% Assume the CAPM is correct, and tge expected future market risk premium is 0.6% per month. The risk free interest rate is 0.3% per month. Required: What were the alpha's for stock T and U over the last 60 months?
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
It is November 2019. The following variance -covariance matrix, for the market (S&P 500) and stocks T and U, is based on monthly data from November 2014 to October 2019. Assume T and U are included in the S&P 500. The betas for T and U are T = 0.727 and U = 0.75.
S&P500 T U
S&P500 0.0256 0.0186 0.0192
T 0.0186 0.1225 0.0262
U 0.0192 0.0262 0.0900
Average monthly risk premiums from 2014 to 2019 were:
S&P500 : 1.0%
T : 0.6%
U : 1.1%
Assume the
Required:
What were the alpha's for stock T and U over the last 60 months?
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