Assume that the CAPM is a good description of stock price returns. The market ex
ID: 2811900 • Letter: A
Question
Assume that the CAPM is a good description of stock price returns. The market expected return is 8% with 11% volatility and the risk-free rate is 3%. New news arrives that does not change any of these numbers but it does change the expected return of the following stocks: EE3 a. At current market prices, which stocks represent buying opportunities? b. On which stocks should you put a sell order in? Complete the table with the alphas below: (Round to one decimal place.) Alpha Volatility 16% 45% 29% 34% Beta 1.61 1.96 0.81 0.96 Expected Return Green Leaf NatSam HanBel Rebecca Automobile 13% 12% 10% 5%Explanation / Answer
ALpha=(expected return-risk free rate-beta*(market return-risk free rate))
Alpha of Green Leaf:
=(13%-3%-1.61*(13%-3%))
=-6.1%
Alpha of NatSam:
=(12%-3%-1.96*(13%-3%))
=-10.6%
Alpha of HanBel:
=(10%-3%-0.81*(13%-3%))
=-1.1%
Alpha of Rebecca Automobile:
=(6%-3%-0.96*(13%-3%))
=-6.6%
No stock represents buying opportunity
Sell all stocks