Purchase Solution

Expected returns and Alpha

Not what you're looking for?

Ask Custom Question

Karen Kay, a portfolio manager at Collins Asset Management, is using the capital asset pricing model for making recommendations to her clients. Her research department has developed the information shown in the following exhibit.
Forecasted Returns, Standard Deviations, and Betas
Forecasted Return Standard Deviation Beta
Stock X 14.0% 36% 0.8
Stock Y 17.0 25 1.5
Market index 14.0 15 1.0
Risk-free rate 5.0
a. Calculate 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.

Purchase this Solution
Solution Summary

The solution explains the calculation of expected returns and alpha

Solution Preview

a. Calculate expected return and alpha for each stock.

Alpha = Forecasted Return - Expected return
We calculate the expected return using CAPM
Expected return = Risk Free Rate + (Market return - risk free rate ) X beta
Stock X
Expected Return = 5% ...

Purchase this Solution
Free BrainMass Quizzes
Basics of Economics

Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.

Pricing Strategies

Discussion about various pricing techniques of profit-seeking firms.

Economic Issues and Concepts

This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.

Elementary Microeconomics

This quiz reviews the basic concept of supply and demand analysis.

Economics, Basic Concepts, Demand-Supply-Equilibrium

The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.

View More Free Quizzes
Related BrainMass Solutions

  • Finding Expected Return, Variance Return and Standard Deviation

    383337 Finding Expected Return, Variance Return and Standard Deviation Consider the following probability distribution of returns for Alpha Corporation: Current Stock Price ($) Stock Price in One Year ($) Return R Probability PR

  • Calculate the stocks alpha to determine which stocks to buy

    Assume that the CAPM is a good description of stock price returns. The market expected Return is 7% with 10% volatility and the risk-free rate is 3%.

  • The Credibility of the Jensen's Performance Index

    Another definition: According to Pareto (2010) the Jensen measure is also based on CAPM and it calculates the excess return that a portfolio generates over its expected return. This is known as "alpha."

  • standard deviation of the returns

    127382 Standard deviation of the returns 1. Consider the single-index model. The alpha of a stock is 0%. The expected return on the market is 12%. The risk-free rate of return is 6%.

  • Calculating the expected return and standard deviation

    Compute the expected return for Alpha Corporation. (B). Compute the standard deviation of the return on Alpha Corporation. Please refer attached file for better clarity of tables and missing formulas.

  • This post calculates the cost of equity for XYZ Corp.

    B) Compute the markets and XYZ's excess returns for each year. Estimate XYZ's beta. C) Estimate XYZ's historical alpha. D) Suppose the current risk-free rate is 3%, and you expect the markets return to be 8%.

  • Hedge Funds and Alphas

    The difference between the fair and actual expected rates of return on a stock is called the stock's alpha" (http://www.hedgefund-index.com/d_alpha.asp).

  • Jensen's Alpha and Sharpe Ratio

    In Jensen's Alpha, higher the value, better is the rank, since it measures the difference between actual and expected.

  • CAPM and risk free return

    (b) If the risk-free return was 7% every year and the expected market return was 13% every year, who should get the higher bonus? Why? (Credit only if reasoning is correct) (a) Ms. Evans. Because the alpha of Mr.

View More Related Solutions