Assume that the CAPM holds. Stock ABC has the expected return of ABC =volatility of σABC = 28%. It has a market beta of BABCThe expected return on the market portfolio is TMσM = 30%.==0.6.7.4% per year and return12%, and the return volatility of the market portfolio isThe annual risk-free rate is rf=5%.Compute the CAPM alpha of ABC.%Compute the volatility of the idiosyncratic component of return of ABC.%

The alpha indicates how well an investment performs in relation to expectations. An investment…

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Compute the CAPM alpha of ABC. % Compute the volatility of the idiosyncratic component of return of ABC. %

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter6: Risk And Return

Section: Chapter Questions

Problem 14P: You have observed the following returns over time: Assume that the risk-free rate is 6% and the...

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Loanable Funds Theory

The loanable funds theory is a neoclassical theory that determines the interest rate where the demand for loanable investments and supply of loanable funds intersect. To determine the interest rate, this theory employs linear regression and a demand curve. At the equilibrium point, demand for borrowings and demand for the issuance of borrowing funds are inextricably linked. This point of equilibrium should equalize demand and the supply of money available for borrowing.

Question

Assume that the CAPM holds. Stock ABC has the expected return of ABC =
volatility of σABC = 28%. It has a market beta of BABC
The expected return on the market portfolio is TM
σM = 30%.
=
=
0.6.
7.4% per year and return
12%, and the return volatility of the market portfolio is
The annual risk-free rate is rf
=
5%.
Compute the CAPM alpha of ABC.
%
Compute the volatility of the idiosyncratic component of return of ABC.
%

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