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.

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

Consider the following probability distribution of returns for Alpha Corporation:
Current Stock Price ($25):
One Year ($) $35, $25, $20;
Return R: 40%, 0%, -20%;
Probability PR: 25%, 50%, 25%.
(A). Compute the expected return for Alpha Corporation.
(B). Compute the standard deviation of the return on Alpha Corporati

Calculate the stocks alpha so that I can determine which stocks to buy in the problem ( my book is no help)
2. 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%. New news arrives that does
not change any of these numbers

Consider the following probability distribution of returns for Alpha Corporation:
Current Stock Price ($) Stock Price in One Year ($) Return R Probability PR
$35 40% 25%
$25

Calculate the expected return and standard deviation of returns for asset A are (See below.)
Possible Outcomes Probability Returns (%)
Pessimistic 0.25 5
Most likely 0.55 10
Optimistic 0.20 13

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%. The expected return on the stock exceeds the risk free rate by 10%. What is the beta of the stock?
2. You estimate an index (CAPM) model running a regression of rHP - rf on a constant a

An investment of $20 in Stock A is expected to pay no dividends and have value of $24 in 1 year. An investment of $70 in Stock B is expected to generate a $2.50 dividend next year and price of its stock is expected to be $78.
1) What are the expectedreturns
2) If the required return is 10%, which
stock(s) should be profit

Hi,
I am fairly new to economics with only a basic understand of the topic and because of this I am struggling to answer (and understand the explanation for the answer) a question about the Cobb Douglas production function.
Q. Under what conditions does a Cobb-Douglas production function (q=AL^(alpha)K^(beta)) exhibit decr

You expect to invest your funds equally in four stocks with the following expectedreturns:
STOCK A 16%
STOCK B 14
STOCK C 10
STOCK D 8
At the end of the year, each stock had the following realized returns:
STOCK A -6%
STOCK B 18
STOCK C 3
STOCK D -22
Compare the portfolio's expectedand realized ret

1. If alpha is an r-cycle, show that alpha^r = (1). [There's a hint that
If alpha = (i sub 0 ... i sub r-1), show that alpha ^k(i sub 0) = i sub k.]
2. Show that an r-cycle is an even permutation if and only if r is odd.
3. If alpha is an r-cycle and 1alpha^k an r-cycle?