Question

A portfolio manager is considering the inclusion of Garmin Ltd (GRMN) in his portfolio. The manager gathers the following information:

• GRMN current stock price is $53.12.

• The analyst’s estimate of GRMN’s intrinsic value is $56.00.

• In addition to the full correction of the difference between GRMN’s stock price

  and the estimated intrinsic value, the analyst forecasts additional price

  appreciation of $4.87 and a cash dividend of $0.28 over the next year.

• The required rate of return for GRMN is to be estimated using the CAPM with the following inputs: risk-free rate of 3.35%, an equity risk premium of 4.5%, and a

  beta of 1.30.

  Now, assume the year passes, and at year-end, the portfolio manager gathers the following additional information:

• Over the year, the realized return for GRMN was 8.9%.

• The realized rate of return on stocks of similar risk during the year was negative

  10.4%.

7. 7.) What is the portfolio manager’s expected holding period return, in percent, for GRMN over the next year? (2 points)

8. 8.) What is the portfolio manager’s estimate of ex-ante alpha, in percent, for GRMN over the next year? (2 points)

9. 9.) What was the ex-post alpha, in percent, for GRMN over the year? (1 point)

Answer 1