Suppose that the risk-free rate of return is 5%, and the expected rate of return on the market portfolio (with a beta of 1) is 14%. In addition, investors forecast a rate of return of 15% for Stock X, and of 17% for Stock Y. The two stocks have a standard deviation and beta as indicated in the Table below. Stocks Standard Deviation Beta X 36 % 0.8 Y 25 % 1.5 a. Calculate the fair expected rate of return and the alpha for each stock

Suppose that the risk-free rate of return is 5%, and the expected rate of return on the market portfolio (with a beta of 1) is 14%. In addition, investors forecast a rate of return of 15% for Stock X, and of 17% for Stock Y. The two stocks have a standard deviation and beta as indicated in the Table below. Stocks Standard Deviation Beta X 36 % 0.8 Y 25 % 1.5 a. Calculate the fair expected rate of return and the alpha for each stock

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter3: Risk And Return: Part Ii

Section: Chapter Questions

Problem 3P: Two-Asset Portfolio Stock A has an expected return of 12% and a standard deviation of 40%. Stock B...

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