Question

You are told that Land's End, a catalog retailer, earned an excess return (Jensen's alpha), in annualized terms, of 32% over the last 5 years and that it had a beta of 1.50 during the same period. Assuming that this estimate came from a quarterly regression of stock returns against a market return, and that the average annualized risk-free rate during the period was 4.8%, estimate the intercept on the regression. ( 3 points)

Answer 1

If we put the given information in regression equation.

Stock returns = R_s = 32%

Market Return = R_{m =} 4.8%

The beta (β) is = $\beta$ = 1.5

R_{s = $\alpha + \beta *R_{m}$}

32% = $\alpha + 1.5* 4.8$

32% = $\alpha + 7.2$ %

$\alpha = 32%/7.2%$%/ 7.2%

4.44% is the intercept.

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