You bought a stock with a beta of 1.4 and earned a return of 8.3%. Did you outperform the market if, during the same period, the market rose by 7.4% and you could have earned 5.4% by investing in a Treasury bill??
What will be an ideal response?
The material in this problem was not explicitly covered in the chapter. You may use the problem to set up the question, "What return should you have earned during a particular investment horizon?" The answer uses the capital asset model to evaluate performance. Thus, the return that should have been realized is? Rf + (Rm - Rf) beta = 5.4% + (8.3 - 5.4)1.4 = 9.46%.?The actual return (8.3% return) is less than the return that would be expected given the beta and the market performance. The stock under-performed the market on a risk-adjusted basis.
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What will be an ideal response?
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