The table below gives information on the expected and required rates of return based on the CAPM for three securities an analyst is valuing:
|
Expected Rate |
CAPM Required Rate |
|
|
Security 1 |
0.2 |
0.21 |
|
Security 2 |
0.18 |
0.08 |
|
Security 3 |
0.11 |
0.1 |
A. Define ex ante alpha.
B. Calculate the expected alpha of Securities 1, 2, and 3 and rank them from most attractive to least attractive.
C. Based on your answer to Part B, what risks attach to selecting among Securities 1, 2, and 3?