Assume that the UK shortterm 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
ReturnRisk Free Rate) =2%+0.8*(5%2%) =4.4%
Expected Return of Stock 2 =Risk Free Rate +Beta*(Market
ReturnRisk Free Rate) =2%+0.9*(5%2%) =4.7%
Expected Return of Stock 3 =Risk Free Rate +Beta*(Market
ReturnRisk Free Rate) =2%+1*(5%2%) =5.0%
Expected Return of Stock 4 =Risk Free Rate +Beta*(Market
ReturnRisk Free Rate) =2%+1.1*(5%2%) =5.3%
Expected Return of Stock 5 =Risk Free Rate +Beta*(Market
ReturnRisk 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
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