CMA Final · Strategic Financial Management · Asset Pricing Theories
A portfolio has 60% in Stock P (beta 0.8) and 40% in Stock Q (beta 1.5). Rf is 5% and the market return is 12%. Stock P's expected return is 11% and Stock Q's expected return is 16%. What is the portfolio's alpha relative to CAPM?
The alpha is 0.44%, but this is not among the options as written, so the keyed option is flawed.
- A+0.34%Correct
- B+0.60%
- C-0.34%
- D+1.34%
Explanation
Portfolio beta = 0.6x0.8 + 0.4x1.5 = 1.08. Required return = 5% + 1.08x7% = 12.56%. Expected return = 0.6x11% + 0.4x16% = 6.6% + 6.4% = 13.0%. Alpha = 13.0% - 12.56% = +0.44%. Recheck: 1.08x7 = 7.56, plus 5 = 12.56; 13.0 - 12.56 = 0.44.
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