The risk-free rate is 4.6% and the expected return on the market is 10.5%. Stock A has a beat of 1.2. For a given year, Stock A returned 15.9% while the market returned 13.8%. The systematic portion of the return was _________ and the unsystematic portion was _________.
A) 3.01%; 1.23%
B) 2.85%; 1.07%
C) 3.96%; 0.26%
D) 1.57%; 0.87%
E) 2.25%; 1.69%

Question

Quizplus · Accepted Answer

3.96%; 0.26%The systematic portion of the return is calculated using the Capital Asset Pricing Model (CAPM) formula: Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). For Stock A, this is 4.6% + 1.2 * (10.5% - 4.6%) = 4.6% + 1.2 * 5.9% = 4.6% + 7.08% = 11.68%. The actual return was 15.9%, so the unsystematic portion is the difference between the actual return and the expected return based on CAPM, which is 15.9% - 11.68% = 4.22%. However, the systematic portion of the return as per the question's context seems to be calculated differently, focusing on the difference between the actual market return and the expected market return, which might have led to confusion in the explanation. The correct systematic and unsystematic portions should align with the CAPM model and the actual return difference, but the provided options and calculations do not fully align with standard CAPM calculations. The closest match given the options would be based on understanding the systematic risk as related to the market's performance and the beta, but the precise calculation method for the options provided is not standard.

The Risk-Free Rate Is 4