Matthews Corporation has a beta of 1.2. The annualized market return yesterday was 13%, and the risk-free rate is currently 5%. You observe that Matthews had an annualized return yesterday of 17%. Assuming that markets are efficient, this suggests that
A) bad news about Matthews was announced yesterday.
B) good news about Matthews was announced yesterday.
C) no news about Matthews was announced yesterday.
D) interest rates rose yesterday.
E) interest rates fell yesterday.

Question

Quizplus · Accepted Answer

Given the information, the expected return for Matthews Corporation can be calculated using the Capital Asset Pricing Model (CAPM), which is: Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). Plugging in the given values: Expected Return = 5% + 1.2 * (13% - 5%) = 14.6%. Since Matthews had an actual return of 17%, which is higher than the expected return of 14.6%, it suggests that there was good news about Matthews that led to its higher-than-expected performance.

Matthews Corporation Has a Beta of 1