A Single Index Model Parameters An analyst estimates a stock

A.

Single Index Model Parameters An analyst estimates a stock\'s alpha, beta and ?_e using excess returns. The part of the stock\'s excess return that is related to movements in the market index is measured by the _____, the excess return that occurred if the market\'s excess return is zero is estimated by the _____ and the firm specific component of excess return that is unrelated to market movements is measured by _____.

beta, ?_e, alpha

?_e, alpha, beta

beta, alpha, ?_e

alpha, beta, ?_e

_B.

II and III only

I only

I and II only

I, II and III

C.

Asset Allocation Between Risky and Riskless Investments You have a risky portfolio with a beta of 1.5. You wish to reduce the portfolio beta to 0.6. In order to do this you will change your asset allocation and add risk free government bonds. What percentage of your investment should be in government bonds and what percentage should be in the risky portfolio to accomplish your goal?

46.18%

36.48%

33.4%

40%

C.

revised up by 5.4%

revised down by 5.4%

unchanged

revised down by 3%

Single Index Model Parameters An analyst estimates a stock\'s alpha, beta and ?e using excess returns. The part of the stock\'s excess return that is related to movements in the market index is measured by the _____, the excess return that occurred if the market\'s excess return is zero is estimated by the _____ and the firm specific component of excess return that is unrelated to market movements is measured by _____.

R1 R3 R4 RM RM R5 R6 R7 R8 RM RM

Solution

A)

The correct option is

Beta, Alpha, e

An analyst estimates a stock\'s alpha, beta and e using excess returns. The part of the stock\'s excess return that is related to movements in the market index is measured by the Beta, the excess return that occurred if the market\'s excess return is zero is estimated by the Alpha and the firm specific component of excess return that is unrelated to market movements is measured by e

B)

I and II Only

C)

Risky Beta = 1.5

Government Bond’s Beta = 0

Portfolio Beta = 0.6

1.5 * R + 0*G = 0.6

R = 0.6/1.5 = 0.4 = 40%

Correct option is 40%

D)

The return on stock would be 1.8 * - 3% = -5.4%

Correct answer is revised down by 5.4%