Security A has an expected rate of return of 0.10 and a beta of 1.1.The market expected rate of return is 0.08 and the risk-free rate is 0.05.The alpha of the stock is
A) 1.7%.
B) -1.7%.
C) 8.3%.
D) 5.5%.
E) none of these.

Question

Quizplus · Accepted Answer

The alpha of the stock is calculated as the difference between the expected return and the required return based on the Capital Asset Pricing Model (CAPM). The required return is calculated as: Risk-free rate + Beta * (Market return - Risk-free rate) = 0.05 + 1.1 * (0.08 - 0.05) = 0.083. The alpha is then: Expected return - Required return = 0.10 - 0.083 = 0.017 or 1.7%.

Security a Has an Expected Rate of Return of 0