Question
A portfolio manager is considering the inclusion of Garmin Ltd (GRMN) in his portfolio. The manager gathers the following information: GRMN current stock price is
A portfolio manager is considering the inclusion of Garmin Ltd (GRMN) in his portfolio. The manager gathers the following information:
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GRMN current stock price is $53.12.
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The analysts estimate of GRMNs intrinsic value is $56.00.
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In addition to the full correction of the difference between GRMNs stock price
and the estimated intrinsic value, the analyst forecasts additional price
appreciation of $4.87 and a cash dividend of $0.28 over the next year.
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The required rate of return for GRMN is to be estimated using the CAPM with the following inputs: risk-free rate of 3.35%, an equity risk premium of 4.5%, and a
beta of 1.30.
Now, assume the year passes, and at year-end, the portfolio manager gathers the following additional information:
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Over the year, the realized return for GRMN was 8.9%.
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The realized rate of return on stocks of similar risk during the year was negative
10.4%.
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7.) What is the portfolio managers expected holding period return, in percent, for GRMN over the next year? (2 points)
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8.) What is the portfolio managers estimate of ex-ante alpha, in percent, for GRMN over the next year? (2 points)
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9.) What was the ex-post alpha, in percent, for GRMN over the year? (1 point)
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