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1. Suppose you are a portfolio manager using the capital asset pricing model for making recommendations to her clients. You have the information shown in the following table.
|
|
Actual/realised return |
Standard deviation |
Beta |
|
Stock A |
14.1% |
36.1% |
0.81 |
|
Stock B |
17.1% |
25.1% |
1.51 |
|
Market index |
14.1% |
15.1% |
1.0 |
|
Risk-free rate |
5.1% |
|
|
a. Calculate the fair expected return and alpha for each stock
b. Identify and justify which stock would be more appropriate for an investor who wants to:
i. add this stock to a well-diversified equity portfolio. ii. hold this stock as a single-stock portfolio.
c. Explain:
i. What is Beta?
ii. In practice we do not observe Beta but stock prices, market index, and risk-free rate, etc. How do we calculate Beta?
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