3 A portfolio manager summarises the inputfrom forecasts in the following table:Beta(B)FinancialAssetAveragereturn7.7%2.4%10.8%Excess market return is 6% and thestandard deviation of market return isStock AStock BStock C0.80.41.218%. Assuming that all variables areprovided on an annualised basis, youare asked to perform the followingtasks:i. Using the Capital Asset Pricing Model tocalculate the expected excess return, alphavalues for these stocksii. Calculate the weight of these stocks in theoptimal risky portfolio

Capital Asset Pricing Model gives you the relation between Expected Return of an Asset and…

Answered: A portfolio manager summarises the…

A portfolio manager summarises the input from forecasts in the following table: Average Financial Asset Beta return (B) Stock A 7.7% 0.8

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 20P

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Concept explainers

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.

Question

A portfolio manager summarises the input
from forecasts in the following table:
Beta
(B)
Financial
Asset
Average
return
7.7%
2.4%
10.8%
Excess market return is 6% and the
standard deviation of market return is
Stock A
Stock B
Stock C
0.8
0.4
1.2
18%. Assuming that all variables are
provided on an annualised basis, you
are asked to perform the following
tasks:
i. Using the Capital Asset Pricing Model to
calculate the expected excess return, alpha
values for these stocks
ii. Calculate the weight of these stocks in the
optimal risky portfolio

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