Question
I ONLY NEED PART E ANSWERED. I'VE RESEARCHED AND ALL I FIND IS ALPHA IS NOT PERSISTENT WHICH I DONT UNDERSTAND - NEED BETTER EXPLANATION.
I ONLY NEED PART E ANSWERED. I'VE RESEARCHED AND ALL I FIND IS "ALPHA IS NOT PERSISTENT" WHICH I DONT UNDERSTAND - NEED BETTER EXPLANATION. THANKS! WILL RATE FOR GOOD EXPLANATION.
Estimate the equity cost of capital for XYZ Corp. You have the following data available regarding past returns:
Year | Risk-Free Return | Market Return | XYZ Return |
---|---|---|---|
2019 | 3% | 6% | 10% |
2020 | 1% | -37% | -45% |
a. What was XYZs average historical return?
b. Compute the markets and XYZs excess returns for each year. Estimate XYZs beta.
c. Estimate XYZs historical alpha.
d. Suppose the current risk-free rate is 3%, and you expect the markets return to be 8%. Use the CAPM to estimate an expected return for XYZ Corp.s stock.
e. How does your answer to part (c) affect your estimate? Explain.
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