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Exercise #8

# Exercise #8 - −.054 =.1294 Unexpected return R − E(R...

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1 Finance 355: Investments Instructor: Shuming Liu In-Class Exercise 8 The risk-free rate is 5.4 percent and the expected return on the market is 11.2 percent. Stock A has a beta of 1.3. For a given year, stock A returned 14.8 percent while the market returned 12.7 percent. The systematic portion of the return was _____ percent and the unsystematic portion was _____ percent. ANSWER: Based on CAPM, E(R) = .054 + 1.3(.112
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Unformatted text preview: − .054) = .1294 Unexpected return : R − E(R) = .148 − .1294 = .0186 Systematic portion : [ R M − E(R M )] × β = (.127 - .112) × 1.3 = .015 × 1.3 = .0195 Unsystematic portion : [ R − E(R)] − [R M − E(R M )] × β = (.148 − .1294) − (.127 - .112) × 1.3 = .0186 − .0195 = -.0009 The systematic portion is 1.95 percent and the unsystematic portion is -0.09 percent....
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