The expected return on the market portfolio is 15%. The risk-free rate is 8%. The expected return on SDA Corp. common stock is 16%. The beta of SDA Corp. common stock is 1.25. Within the context of the capital asset pricing model, ________.
A) SDA Corp. stock is underpriced
B) SDA Corp. stock is fairly priced
C) SDA Corp. stock's alpha is -.75%
D) SDA Corp. stock alpha is .75%

Question

Quizplus · Accepted Answer

α = .16 − [.08 + 1.25(.15 − .08)] = −.0075

The Expected Return on the Market Portfolio Is 15