Beta = -0.5 ; Alpha = -2% ; risk free rate = 5% market expected return 8%.
Market risk Premium :
The amount by which excess market return exceeds risk free rate.
Market Risk Premium (MRP) = rm - rf
MRP = 8% - 5% = 3%
It is the reward that investor demand for holding a portfolio with a beta.
MRP is a part of CAPM.
ri = rf + (rm - rf) *
ri= 0.05 + (0.08 - 0.05) * -0.5
= -0.04
(i.e) 0.04
Expected Return ( CAPM): Capital Asset Pricing Model:
r = Rf + beta (Rm - Rf) + alpha
Therefore,
= R - Rf - (Rm - Rf)
here, Rf + beta (Rm - Rf) + alpha
r = 0.05 + (-0.5) (0.08-0.05) + (-0.02)
r= 0.05 + (-0.015) + (-0.02)
r = 0.015 or 1.5%
The excess return of an investment which relates to the Return of a benchmark index .
Alpha can be used as a metric for evaluating performance of a manager overall.
In investment , there is also a metric known as jensen's Alpha:
Here, Jenson Alpha is calcualted as:
Jensen's Alpha = R(i) -(R(f) +B(R(m)- R (f)))
Conclusion:
CAPM predicts that alpha should be Zero for all the Assets.
The alpha of the stock is its expected return in excess of the fair expected return .
If the stock is fairly priced ,its alpha must be Zero.
12. Portfolio has beta=-0.5; its alpha is -2%, risk free rate is 5%; market expected return...
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