Question

What is the expected return on a stock if the firm will earn 24% during a period of economic boom, 14% during normal economic periods, and 2% during a period of recession if the probabilities of these economic environments are 20%, 65%, and 15%, respectively?

What is the required return using the capital asset pricing model if a stock's beta is 1.2 and the individual, who expects the market to rise by 11.2%, can earn 4.4% invested in a risk-free Treasury bill?

You bought a stock with a beta of 1.4 and earned a return of 8.3%. Did you outperform the market if, during the same period, the market rose by 7.4% and you could have earned 5.4% by investing in a Treasury bill?

Answer 1

1
=24%*20%+14%*65%+2%*15%=14.20%

2
=4.4%+1.2*(11.2%-4.4%)=12.56%

3
=8.3%-5.4%-1.4*(7.4%-5.4%)=0.10%

Yes outperformed the market as we have earned positive alpha