Question
Using the single-index model and monthly returns, an analyst has estimated: The alpha of stock 1 is 0.03 and the alpha of stock 2 is
Using the single-index model and monthly returns, an analyst has estimated:
The alpha of stock 1 is 0.03 and the alpha of stock 2 is 0.04. The beta of stock 1 is 0.5 and the beta of stock 2 is -0.4.
The annually compounded risk-free rate is 3%.
Consider the following statements.
I. The value of ALPHA for stock 1 reported in a standard industry book would be greater than 0.03.
II. The value of ALPHA for stock 2 reported in a standard industry book would be greater than 0.05.
Which of the following is correct?
a.
Statements I and II are both incorrect.
b.
Statement I is correct, Statement II is incorrect.
c.
Statements I and II are both correct.
d.
Statement I is incorrect, Statement II is correct.
Clear my choice
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started