You gather the following data: ABC has a CAPM beta of 0.75 and an annual standard deviation of returns equal to 70%. The S&P 500 has an annual standard deviation of returns equal to 17%, and we can use the S&P 500 as a proxy for the market portfolio in this problem. The risk free rate is 0.6%. The expected return on the S&P 500 is 9% per year.
a) What would the r-squared be if you ran the CAPM regression on ABC?
b) If the average return on ABC has been 10% per year, what is the estimated CAPM alpha?
c) If the CAPM is true, and the S&P’s returns were -4% in January 2014, what is the expected return on ABC during that month?