Question

# Assume that the UK short-term government bond yield is 2% and the FTSE All Shares Index...

Assume that the UK short-term government bond yield is 2% and the FTSE All Shares Index return is 5%.

 Stock I II III IV V Actual returns (%) 4.5 4.7 5.3 5.3 5.2 CAPM beta 0.8 0.9 1 1.1 1.2

Which of the following is true?

 A. The actual returns of Stocks I and V are equal to their expected returns B. The actual returns of Stocks III and V are equal to their expected returns C. The actual returns of Stocks I and III are equal to their expected returns D. The actual returns of Stocks II and IV are equal to their expected returns E. None of the above

Expected Return of Stock 1 =Risk Free Rate +Beta*(Market Return-Risk Free Rate) =2%+0.8*(5%-2%) =4.4%
Expected Return of Stock 2 =Risk Free Rate +Beta*(Market Return-Risk Free Rate) =2%+0.9*(5%-2%) =4.7%
Expected Return of Stock 3 =Risk Free Rate +Beta*(Market Return-Risk Free Rate) =2%+1*(5%-2%) =5.0%
Expected Return of Stock 4 =Risk Free Rate +Beta*(Market Return-Risk Free Rate) =2%+1.1*(5%-2%) =5.3%
Expected Return of Stock 5 =Risk Free Rate +Beta*(Market Return-Risk Free Rate) =2%+1.2*(5%-2%) =5.6%

Option d is correct option The actual returns of Stocks II and IV are equal to their expected returns

#### Earn Coins

Coins can be redeemed for fabulous gifts.