4. Consider the following equation of the CAPM: E(R) = 5%+B₁*10% P is an equally-weighted portfolio composed of the risk-free rate and stocks A, B and C. The following characteristics are given with respect to the three stocks: Stock Po E(P) E(D) B A 100 112 5 1.1 B 5 5.5 1 0.7 C 10 8 1.3 Compute the expected alpha of this portfolio. 4
4. Consider the following equation of the CAPM: E(R) = 5%+B₁*10% P is an equally-weighted portfolio composed of the risk-free rate and stocks A, B and C. The following characteristics are given with respect to the three stocks: Stock Po E(P) E(D) B A 100 112 5 1.1 B 5 5.5 1 0.7 C 10 8 1.3 Compute the expected alpha of this portfolio. 4
Chapter8: Analysis Of Risk And Return
Section: Chapter Questions
Problem 25P
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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.
Question
Transcribed Image Text:4. Consider the following equation of the CAPM:
E(R) = 5%+B₁*10%
P is an equally-weighted portfolio composed of the risk-free rate and stocks A, B and C. The
following characteristics are given with respect to the three stocks:
Stock
Po
E(P)
E(D)
В
A
100
112
5
1.1
B
5
5.5
1
0.7
с
10
8
4
1.3
Compute the expected alpha of this portfolio.
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