Question

5. Takeshi bought shares of stock QWX on 12/31/2010. He uses the CAPM and estimates that the risk-free rate is 2%, the market risk premium is 10% and the CAPM beta for stock QWX is 1.5. In the year 2011, the return for stock QWX was -5% and the return for the market portfolio was also -5%. Would you say that Takeshi demonstrated positive skill, negative skill, or no skill, in choosing to buy QWX? Why?

Answer 1

Beta of a security tells how a security is going to move in respect to the market.

The beta of the security is 1.5 means if market moves by 1 point the security will move by 1.5 points.

In the given situation the market moved by -5% the stock should have moved by 1.5 * (-5%) = 7.5%. but it only moved by -5% which is positive skill demonstration by Takeshi demonstrated.

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