Consider an asset that has a beta of 1.5. The return on the risk-free asset is 6.5% and the expected return on the stock index is 15%. The estimated return on the asset is 20%. Calculate the alpha for the asset.
A)19.25%
B)0.75%
C)-0.75%
D)9.75%
E)9.0%

Question

Quizplus · Accepted Answer

Alpha is calculated as the difference between the actual return and the expected return based on the Capital Asset Pricing Model (CAPM). The expected return using CAPM is: 6.5% + 1.5 * (15% - 6.5%) = 19.25%. The alpha is 20% - 19.25% = 0.75%.

Consider an Asset That Has a Beta of 1