What is the expected excess return for each stock

Assignment Help Financial Management

Reference no: EM131874708

Show all work, calculations and formulas.

You observe that IBM, Google, and Facebook’s stock returns have the betas in the table provided below. Suppose the expected market return is 8% and the risk-free rate is 3%.

Stock Beta

IBM 1.5

Google 0.9

Facebook 0.5

a. Suppose the CAPM holds, what is the expected excess return for each stock?

b. You decide to take a long position in IBM and a short position in Google. According to the CAPM, what is the expected return from this investment strategy?

c. You regressed your portfolio that takes a long position in IBM and a short position in Google, on excess market returns. The equation you estimated is below.

a + B (Rm - Rf) +e

According to the CAPM what is the expected value of each parameter and why? (i.e. E(a) = ?, E(B) = ?, E(e)=?)

Reference no: EM131874708

Questions Cloud

Explain the characteristics of forester : Forester LLC, a jewelry store, has developed a sustainable competitive advantage. Which of the following characteristics of Forester is most likely.

Mutations and acquisition of plasmid dna important : Why are mutations and acquisition of plasmid DNA important in the process of natural selection and the evolution of organisms?

Identify an executive order that a us president has issued : Identify an executive order that a U.S. president has issued in the past 2 years. Discuss why you think this was or was not a good use of presidential power.

Different kinds of harmful poisons : There are many different kinds of harmful poisons that interfere with metabolic functions. One such compound is 2,4-Dinitrophenol or DNP.

What is the expected excess return for each stock : Suppose the CAPM holds, what is the expected excess return for each stock?

Why are some executive orders controversial : What are executive orders and upon what powers are they based? Why are some executive orders controversial?

Solve a queing problem for your business unit : Formulate develop, and solve a queing problem for your business unit. For example, the phone calls coming to the receptionist, or work arriving by mail, phone.

Why hyperthermophile is unlikely to be human pathogen : Explain why hyperthermophile is unlikely to be human pathogen and explain why and how refrigerator , freezing,and curing a meat in salt are each mechanism

What is the average cash flow : What is the average cash flow you will receive from the mine if it is always kept in operation and the silver always is sold in the year it is mined?

User Account

All Pages