In a recent closely contested lawsuit, Apex sued Bpex for patent infringement. T

Question

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 = 3.5%. The rate of return on Bpex was only rB = 3.1%. The market today responded to very encouraging news about the unemployment rate, and rM = 3.2%. The historical relationship between returns on these stocks and the market portfolio has been estimated from index model regressions as: What is the predicted returns for Apex & Bpex? (Do not round intermediate calculations. Round your answers to 1 decimal place. Omit the "%" sign in your response.) Which company do you think won the lawsuit?

Explanation / Answer

Answer a

Apex rA=0.2%+(1.6*3.2%) = 5.32%

Bpex rB=-0.1%+(0.8*3.2%) = 2.46%

Answer b

Apex=3.5-5.32=-1.82

Bpex=3.1-2.46= 0.64

Apex underperformedthis prediction; Bpex outperformedthe prediction. Weconclude that Bpex won the lawsuit

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