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What is the expected excess return for each stock

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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

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