You observe that ibm google and facebookrsquos stock


You observe that IBM, Google, and Facebook’s stock returns have the betas in the table provided below. Suppose the expected market return is 8% and the risk-free rate is 3%.

Stock Beta:

IBM 1.5

GOOGLE 0.9

FB 0.5

a. Suppose the CAPM holds, what is the expected excess return for each stock?

b. You decide to take a long position in IBM and a short position in Google. According to the CAPM, what is the expected return from this investment strategy?

c. You regressed your portfolio that takes a long position in IBM and a short position in Google, on excess market returns. The equation you estimated is below. ( ) According to the CAPM what is the expected value of each parameter and why?

a+B(Rm-Rf)+e

(i.e. E(a) = ?, E(B) = ?, E(e)=?)

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Financial Management: You observe that ibm google and facebookrsquos stock
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