Question

A security 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 __.

Answer 1

1.7%

Step-by-step explanation:

The computation of the alpha of the stock is shown below:

Expected rate of return = Risk-free rate of return + Beta × (Market rate of return - Risk-free rate of return) + Alpha

0.10 = 0.05 + 1.1 × (0.08 - 0.05) + Alpha

0.10 = 0.05 + 1.1 × 0.03 + Alpha

0.10 = 0.05 + 0.033 + Alpha

0.10 = 0.083 + Alpha

So, alpha would be

= 0.10 - 0.083

= 0.017 or 1.7%