The stock of ABC Corporation has a beta of 1.8, ABC Corporation earned an annual return of 14 percent during a period when the return on the market portfolio was 12.5 percent. If the risk-free rate was 6 percent, did ABC Corporation outperform the market on a risk-adjusted basis?

To evaluate if ABC Corporation outperformed the market on a risk-adjusted basis, you can use the Capital Asset Pricing Model (CAPM) which calculates the expected return of an asset based on its beta and the risk-free rate of return. The formula for the CAPM expected return is:

Expected return (ER) = Risk-free rate (Rf) + Beta (β) * (Market return (Rm) - Risk-free rate (Rf))

First, we need to calculate the expected return for ABC Corporation using its beta:

ABC = Rf + β ABC * (Rm - Rf) 

ABC = 6% + 1.8 * (12.5% - 6%) 

ABC = 6% + 1.8 * 6.5% 

ABC = 6% + 11.7% 

ABC = 17.7%

The expected return for ABC Corporation based on its beta would be 17.7%. However, the actual return earned by ABC Corporation was 14%.

Now compare the expected return to the actual return to see if ABC Corporation has outperformed the market on a risk-adjusted basis:

Since the actual return of 14% is less than the expected return of 17.7% based on the CAPM, it appears that ABC Corporation did not outperform the market on a risk-adjusted basis.