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Lansing outperform the market on a risk-adjusted basis

The stock of Lansing Corporation has a beta of 1.2. Lansing earned an annual return of 14 percent during a period when the return on the market portfolio was 12.5 percent. If the risk-free rate was 6 percent, did Lansing outperform the market on a risk-adjusted basis?

There are several publishers who will provide a beta for a company, including Moody's Standard and Poor's, Value Line, and others.

If you saw three different betas for the same company that ranged from 1.0 to 1.7, how would you explain this difference to a local investment club gathering?

Please provide a detailed explanation to the above questions and include any definitions to the finance terms for better clarification.

Thank you,
Student

Solution Preview

The stock of Lansing Corporation has a beta of 1.2. Lansing earned an annual return of 14 percent during a period when the return on the market portfolio was 12.5 percent. If the risk-free rate was 6 percent, did Lansing outperform the market on a risk-adjusted basis?
Outperform the market since 14% > 12.5%.
However, to adjust for risk:
SML equation:
Beta = 1.2, Lansing return = 14%, rM = 12.5%, rRF = 6%
Required return on stock = risk-free rate + (market risk premium) (stock's beta)
ri = rRF + (rM - rRF) bi
= 6% + (12.5% - 6%) (1.2)
= 13.8%
So, Lansing did outperform the market since 14% > 13.8%.

There are several publishers who will provide a beta for a company, including Moody's Standard and Poor's, Value Line, and others.
If you saw three different ...

Solution Summary

The solution determines if Lansing outperformed the market on a risk-adjusted basis. The difference to a local investment club gathering is explained.

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