Shares of small firms with thinly traded stocks tend to show positive CAPM alphas. Is this a violation of the efficient market hypothesis?
The correct answer is “not necessarily a violation of the efficient market hypothesis”.
CAPM is the abbreviated form of a model known as Capital Asset Price Model. It is used by the portfolio managers to project the potential returns of an investment portfolio.
In the above scenario, it is likely that the thinly traded stocks may not have performed a considerable amount of market research and hence implies a greater degree of uncertainty. Therefore these are actually risk premia than the violation of any efficient market hypothesis.
Use the following data in answering CFA Questions:
Investor “satisfaction” with portfolio increases with expected return and decreases with variance according to the “utility” formula: U = E(r) - ½ Aσ2 where A = 4.
Question: Based on the formula above, which investment would you select if you were risk neutral?
Kaskin, Inc., stock has a beta of 1.2 and Quinn, Inc., stock has a beta of .6. Which of the following statements is most accurate?
a. The expected rate of return will be higher for the stock of Kaskin, Inc., than that of
b. The stock of Kaskin, Inc., has more total risk than Quinn, Inc.
c. The stock of Quinn, Inc., has more systematic risk than that of Kaskin, Inc.
You are a consultant to a large manufacturing corporation considering a project with the following net after-tax cash flows (in millions of dollars):
|YEARS FROM NOW||After-Tax CF|
The project’s beta is 1.7. Assuming r f = 9% and E ( r M ) = 19%, what is the net present value of the project? What is the highest possible beta estimate for the project before its NPV becomes negative?
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