Question

You are following five different stocks and need to issue a recommendation (buy, hold, or sell) to your customers. The market return is 10 percent, with a standard deviation of 15 percent. The risk-free rate is 3 percent. The CAPM is assumed to hold.

Security	Expected Return	Standard Deviation	Beta	Recommendation
ABC	15%	19%	1.6
RTS	10%	13%	1.15
DKF	8%	10%	0.65
OPL	9%	14%	0.8
WEQ	12%	16%	1.35

Answer 1

lets calculate the Alpha of the Each stock and if the alpha of the stock is positive than that stock should be purchase and if the Alpha of th stock is negative that stock should be sold off and iff the Alpha is equal to 0 so we should hold that stock:-

Alpha = Market Retrun - Return As Per CAPM

ABC

return as per CAPM = Rf+ beta*(Rm-Rf)

=3%+1.6*(10%-3%)

= 3%+ 11.2

= 14.2%

Alpha = 15%-14.2%

= 0.8%

this stock should Buy

RTS

return as per CAPM = 3%+1.15*(10%-3%)

= 3%+ 8.05%

= 11.05%

Alpha = 10%-11.05%

= -1.05%

this stock should be sold

DKF

return as per CAPM = 3%+0.65*(10%-3%)

= 3%+ 4.55%

= 7.55%

Alpha = 8%-7.55% = 0.45%

this stock should be buy.

OPL

return as per CAPM = 3%+0.8*(10%-3%)

= 3%+ 5.6%

= 8.6%

Alpha = 9%-8.6%

= 0.4%

this stock should be buy

WEQ

return as per CAPM = 3%+1.35*(10%-3%)

= 3%+ 9.45%

= 12.45%

Alpha = 12%-12.45%

= -0.45%

this stock should be sold