The risk-free rate is 4.0% and the expected return on the market is 8%. Stock A has a beta of 1.35. For a given year, Stock A returned 12.0% while the market returned 8.80%. The systematic portion of Stock A's unexpected return was ________% and the unsystematic portion was ________%.
A).80; 1.30
B).90; 1.40
C)1.08; 1.52
D)1.40; .90
E)4.62; 1.41

Question

Quizplus · Accepted Answer

First, we need to find the expected return on Stock A using the CAPM formula: E(Ri) = Rf + βi(Rm - Rf)
E(RA) = 4.0% + 1.35(8.0% - 4.0%) = 9.4%
Next, we can calculate Stock A's unexpected return: 12.0% - 9.4% = 2.6%
To find the systematic portion of the unexpected return, we use the formula: βi(ERm - Rf)
1.35(8.0% - 4.0%) = 5.4%
To find the unsystematic portion, we subtract the systematic portion from the total unexpected return: 2.6% - 5.4% = -2.8%
Note that the unsystematic portion is negative, indicating that Stock A underperformed relative to expectations based solely on its beta.
Therefore, the answer is C: 1.08; 1.52.

The Risk-Free Rate Is 4