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Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter2: Risk And Return: Part I

Section: Chapter Questions

Problem 3Q: Security A has an expected return of 7%, a standard deviation of returns of 35%, a correlation...

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Concept explainers

Market Efficiency

Market efficiency refers to the market's ability to provide investors with all available information about investment options for buying and selling securities. Market efficiency reflects the true value of securities without undervaluing or overvaluing them. When the quality and quantity of information increase, the market becomes more efficient, allowing it to reduce arbitrage and obtain higher market returns from investment. In a well-functioning market, everyone receives all information completely and immediately at no cost. It opens up a plethora of opportunities for investors to access various investment options.

Question

KF2.

--Suppose the return on the market is expected to be 13%, a stock has a beta of 1.3, and the T-bill rate is 4%. You believe your portfolio will achieve an 18% return.

*Briefly describe the value of Alpha you generated insofar as it relates to performance measurement

and the Security Market Line

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We know Alpha = Expected Return E- Required Rate of Return R

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So Alpha =18-15.7= 2.3%

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