The CFO of AAA Inc., a publicly traded firm, makes the following statement: "Our firm is in the business of pharmaceuticals.
Our equity beta is 2.4, the standart error of equity beta is 0.27, r-squared is 0.37 and standart deviation of stock returns is 29%. The risk-free rate is 2%.
Next year, when we expect the market to provide a zero return, I expect the firm to outperform the market and provide a return of 4% on equity."
a). If the CAPM is correct, what % of the risk of AAA is unique risk?
b). What return would you expect from AAA next year?
c). Is the CFO correct in her assessment, too pessimistic, too optimistic?