Security A has an expected rate of return of 12% and a beta of 1.10.The market expected rate of return is 8% and the risk-free rate is 5%.The alpha of the stock is _________.
A) -1.7%
B) 3.7%
C) 5.5%
D) 8.7%

Question

Quizplus · Accepted Answer

The alpha of the stock is calculated as the difference between the actual expected return and the expected return predicted by the Capital Asset Pricing Model (CAPM). The CAPM expected return is calculated as: Risk-free rate + Beta * (Market return - Risk-free rate) = 5% + 1.10 * (8% - 5%) = 8.3%. The alpha is then 12% - 8.3% = 3.7%.

Security a Has an Expected Rate of Return of 12