You hear on the news that the S&P 500 was down 2.6 % today relative to the risk-free rate (the market's excess return was negative 2.6 % ). You are thinking about your portfolio and your investments in Zynga and Proctor and Gamble. a. If Zynga's beta is 1.3, what is your best guess as to Zynga's excess return today? b. If Proctor and Gamble's beta is 0.4, what is your best guess as to P&G's excess return today?

a.

Excess return for Zynga today will be -3.38%

b.

Excess return on P&G today will be -1.04%

Explanation:

The excess return is the return earned above/beyond the benchmark return. This benchmark can be set at either the risk free rate or any other stock or portfolio's return.

The return on a stock is usually calculated using the CAPM equation. The CAPM considers risk free rate, the return on market and the stock's beta to calculate the expected return on a stock.

The market always has a beta of 1. Beta is the measure of the volatility of stock returns. If the excess return on the market falls or rises, the effect of this on a stock's excess return will be based on its beta.

a.

The excess return of Zynga today will be =  -2.6% * 1.3   = -3.38%

b.

The excess return of P&G today will be =  -2.6% * 0.4   = -1.04%

d. all of the above are true.