The riskfree rate is 40 percent and the expected return on t

The risk-free rate is 4.0 percent and the expected return on the market is 8 percent. Sotck A has a beta of 1.35. For a given year, Stock A returned 12.0 percent while the market returned 8.80 percent. The Systematic portion of Stock A\'s unexpected return was ______ percent and the unsystematic portion was _______ percent

A.) 0.80; 1.30

B.) 0.90: 1.40

C.) 1.08: 1.52

D.) 1.40: 0.90

E.) 4.62: 1.41

Solution

Required return originally envisage under CAPM method
Rj = Risk free rate of return + beta(Market return - Risk free rate of return)
=4%+1.35(8%-4%)
4%+1.35(4%)
4%+5.4%
=9.4%
Required return envisage under CAPM method due to chane in market return
Rj = Risk free rate of return + beta(Market return - Risk free rate of return)
=4%+1.35(8.8%-4%)
4%+1.35(4.8%)
4%+6.48%
=10.48%
Now Deviation in retun as per original estimate = 12%-9.4% = 2.6%
Deviation in retun as per revised estimate = 12%-10.48% = 1.52%
Systematic portion of Stock A\'s unexpected return = 2.6%-1.52% = 1.08%
UnSystematic portion of Stock A\'s unexpected return = 1.52%

Thus Ans C.) 1.08: 1.52