Using the single index model, what is the alpha of a stock with beta of 1.2, a market return of 14%, risk free rate of 3% and the actual return of the stock is 18%?
A) −1.37%
B) 0.75%
C) 1.80%
D) 2.11%
E) −3.12%

Question

Quizplus · Accepted Answer

The alpha ($\alpha$) of a stock in the single index model is calculated using the formula: $\alpha = R_i - [R_f + \beta_i(R_m - R_f)]$, where $R_i$ is the actual return of the stock, $R_f$ is the risk-free rate, $\beta_i$ is the beta of the stock, and $R_m$ is the market return. Plugging in the given values: $\alpha = 18\% - [3\% + 1.2(14\% - 3\%)] = 18\% - [3\% + 1.2(11\%)] = 18\% - [3\% + 13.2\%] = 18\% - 16.2\% = 1.8\%$.

Using the Single Index Model, What Is the Alpha of a Stock