Question

7. (10 points) If the return on the market portfolio is expected to be 11% next year, IBM Inc. has a beta of 1.4, and the risk free rate is 3%. Suppose you conduct your own security analysis, and find that the expected retum for IBM next year should be 17%. A 16 points) What is the alpha of IBM when you use CAPM? B. (4 points) Would you buy or short sell IBM? Explain.

Answer 1

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ke - Microsoft Excel (Product Activation Failed) Review File Home Insert Page Layout Formulas Data View Add-Ins Σ AutoSum - Cut A A Wrap Text Calibri 11 General E Copy Fill Merge & Center Insert Delete Format Paste B I U +.0 .00 Conditional Format Cell Sort & Find & Filter Select % .00 0 Format Painter Clear Formatting as Table Styles Clipboard Number Font Alignment Styles Cells Editing fox ЕС47 EMA ЕЕ EF ЕН DZ EA EB ЕС ED EG El EJ ЕК EL 47 48 49 CAPM APPROACH REQUIRED RETURN = Rf beta*(Rm-Rf) 50 REQUIRED RETURN = 3% +1.4*(11%-3%) 51 52 REQUIRED RETURN = 14.20% 53 ALPHA = EXPECTED RETURN - REQUIRED RETURN 54 55 ALPHA = 17%- 14.20% ALPHA= 56 A 2.80% 57 58 В BUY AS ALPHA IS POSITIVE, STOCK IS UNDERVALUED 59 60 61 62 63 64 65 UTILITY, SHARPE, beta R I LEASING PV, FV, ANNUITY clean КE САРМ cONvexity DGM port future INDEX DIR right YIELD bond portfolio EE 130% beta INTL CAP BUD SANDRINE WACC II Rea erences WA 02:04 #ENG 29-11-2019