IAI Actuarial Core Principles · Economic Modelling · Single and multifactor models for investment returns
A share has alpha of 0.5% and beta of 1.4 in the market model. If the market return is 8%, what is the expected share return, ignoring the residual?
The expected return is 11.7%, found as alpha plus beta times the market return: 0.5% + 1.4 x 8% = 11.7%. Leaving out alpha would wrongly give 11.2%.
- A8.5%
- B11.2%
- C11.7%Correct
- D12.6%
- 9.4%
Explanation
Expected return = alpha + beta x market return = 0.5% + 1.4 x 8% = 0.5% + 11.2% = 11.7%. Omitting alpha gives 11.2%.
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