Question

The annualized market return yesterday was 13%, and the risk-free rate is currently 3%. You observe that QQAG had an annualized return yesterday of 20%. Assuming that markets are efficient, this suggests that:

a. bad news about QQAG was announced yesterday.
b. good news about QQAG was announced yesterday.
c. no significant news about QQAG was announced yesterday.
d. interest rates rose yesterday. E. interest rates fell yesterday.

Answer 1

Answer: c. no significant news about QQAG was announced yesterday.

Explanation:

No significant news about QQAG was announced and here is how we know.

Using the Capital Asset Pricing Model (CAPM) we can calculate for the expected return of an efficient market with the following formula,

Er = Rf + b(Rm - Rf)

Where,

Er is the expected return

Rf is the risk free rate

b is beta

Rm is the market return

Calculating then we have

Er of QQAG = 3% + 1.7(13% - 3%)

Er of QQAG = 20%

QQAG having an annualized return yesterday of 20% is expected so there is no significant news that impacted the returns.