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 r,, = 3.6%. The rate of return on Bpex was only rB = 3.0%. 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: Apex: rA = 0.4% + 1.6rM Bpex: r = -0.1% + 0.6rM a. What is the predicted returns for Apex & Bpex? (Do not round intermediate calculations. Round your answers to 1 decimal place. Omit the W sign n your response.) Predicted Returns Apex . . Bpex , . b. Which company do you think won the lawsuit? Apex Bpex

Explanation / Answer

a)

Predicted returns:

Apex: 0.4%+1.6×3.2% = 5.52%

Bpex: -0.1%+0.6×3.2% = 1.82%

b)

Apex underperformed this prediction. Bpex outperformed the prediction. We conclude that Bpex won the lawsuit.

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