Security A has an expected rate of return of 0.10 and a beta of 1.3.The market expected rate of return is 0.10 and the risk-free rate is 0.04.The alpha of the stock is
A)1.7%.
B)-1.8%.
C)8.3%.
D)5.5%.
E)none of the above.

Question

Quizplus · Accepted Answer

Alpha is the excess return of a stock beyond what would be expected from its beta exposure. It is calculated as the difference between the actual return and the expected return (based on the CAPM model).

Using the CAPM model: 
Expected return on Security A = 0.04 + 1.3(0.10 - 0.04) = 0.16 
Actual return on Security A = 0.10

Alpha = Actual return - Expected return = 0.10 - 0.16 = -0.06 = -6%

Therefore, the answer is B) -1.8%, as it is the closest option to -6% (alpha).

Security a Has an Expected Rate of Return of 0