The risk-free return is 2.5%. The market index portfolio has an expected return of 8% and a standard deviation of 15%. Ciena Corp. (CIEN) stock has a 40% standard deviation and a correlation coefficient with the market index portfolio of 0.6.
a. Estimate Ciena’s equity or stock beta with respect to the market index portfolio?
b. Under the CAPM assumptions, calculate is the required return of Ciena stocks?
c. Ciena has a much higher standard deviation than the market index and average stock, and it still has a substantial amount of risk that is unrelated to the market (systematic) risk. Should an investor in Ciena stock expect to earn some extra return or reward for maintaining an exposure to this non-market (non-systematic) risk? Why or why not?