Using the single index model, what is the alpha of a stock with beta of 1.3, a market return of 14%, risk free rate of 4% and the actual return of the stock is 14%?
A) −1.37%
B) 0.75%
C) 1.80%
D) 2.11%
E) −3.00%

Question

Quizplus · Accepted Answer

The alpha ($\alpha$) of a stock in the single index model can be 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: $\alpha = 14\% - [4\% + 1.3(14\% - 4\%)] = 14\% - [4\% + 1.3(10\%)] = 14\% - [4\% + 13\%] = 14\% - 17\% = -3\%$.

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