Boeing has a beta of 1.0. The annualized market return yesterday was 11%, and the risk-free rate is currently 5%. You observe that Boeing had an annualized return yesterday of 14%. Assuming that markets are efficient, this suggests that
A) bad news about Boeing was announced yesterday.
B) good news about Boeing was announced yesterday.
C) no news about Boeing was announced yesterday.
D) interest rates rose yesterday.
E) interest rates fell yesterday.

Question

Quizplus · Accepted Answer

The Capital Asset Pricing Model (CAPM) formula is used to determine the expected return of an asset, given its beta, the risk-free rate, and the market return. The formula is: Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). For Boeing, with a beta of 1.0, the expected return would be 5% + 1.0 * (11% - 5%) = 11%. Since Boeing's actual return was 14%, which is higher than the expected return of 11%, it suggests that there was good news about Boeing that led to its outperformance relative to what was expected based on market movements.

Boeing Has a Beta of 1