Question

The following BETAs were obtained for three stocks: 1.60 for Stock A; 0.95 for Stock B; and, 1.33 for Stock C. If the market's rate of return was 8.00% for a given period of time--and all other things being equal (e.g., ALPHAs and EPSILONS)--then which of the three individual stocks would you expect to have had the highest rate of return for the same period of time? What is the best estimate of the stock's rate of return attributable to the market?

a. Stock A, 9.60%

b. Stock B, 7.60%

c. Stock B, 7.05%

d. Stock C, 9.33%

e. Stock C, 8.00%

f. Stock A, 8.00%

g. Stock B, 8.00%

h. Stock C, 10.64%

i. Stock A, 12.80%

Answer 1

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Please see below calculation :

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For stock A: a + 1.6*8 = 12.80%
For stock B: a + 0.95*8 = 7.6%
For stock C: a + 1.33*8 = 10.64%

So, i, b, and h are correct