Explore BrainMass

Explore BrainMass

    Expected returns and Alpha

    Not what you're looking for? Search our solutions OR ask your own Custom question.

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    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.

    © BrainMass Inc. brainmass.com December 24, 2021, 7:30 pm ad1c9bdddf

    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% ...

    Solution Summary

    The solution explains the calculation of expected returns and alpha