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Suppose you are a portfolio manager using the capital asset pricing model for making recommendations to her clients. You have the information shown in the
Suppose you are a portfolio manager using the capital asset pricing model for making recommendations to her clients. You have the information shown in the following table.
actual return | standard dev | beta | |
stock a | 0.10 | 0.30 | 0.9 |
stock b | 0.15 | 0.20 | 1.25 |
market index | 0.12 | 0.25 | 1.0 |
risk free rate | 0.03 |
1) Calculate the fair expected return and alpha for each stock.
2) Identify and justify which stock would be more appropriate for an investor who wants to i. add this stock to a well-diversified equity portfolio. ii. hold this stock as a single-stock portfolio.
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