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In a recent closely contested lawsuit, Apex sued Bpex for patent infringement
In a recent closely contested lawsuit, Apex sued Bpex for patent infringement. The jury came back today with its decision. The rate of return on Apex was rA = 3.9%. The rate of return on Bpex was only rB = 3.5%. The market today responded to very encouraging news about the unemployment rate, and rM = 3.6%. The historical relationship between returns on these stocks and the market portfolio has been estimated from index model regressions as:
Apex: rA = 0.3% + 1.1rM
Bpex: rB = −0.1% + 0.7rM
a) What is the predicted returns for Apex & Bpex? (Do not round intermediate calculations. Round your answers to 1 decimal place.)
b) Which company do you think won the lawsuit?
Expert Solution
a) Computation of the predicted returns:-
Apex:
rA = 0.3% + 1.1rM
= 0.3% + (1.1 * 3.6%)
= 0.3% + 3.96%
= 4.3%
Bpex:
rB = -0.1% + 0.7rM
= -0.1% + (0.7 * 3.6%)
= -0.1% + 2.52%
= 2.4%
B) Apex underperformed this prediction. Bpex outperformed the prediction. We conclude that Bpex won the lawsuit.
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