Question

The expected return on the market portfolio is 17%. The risk-free rate is 8%. The expected return on SDA Corp. common stock is 16%. The beta of SDA Corp. common stock is 1.50. Within the context of the capital asset pricing model, _________.

Answer 1

SDA Corp. stock's alpha is -0.75%

Step-by-step explanation:

If we consider that the market risk premium is equal to:

15% - 8% = 7%

We can say that X would have a return of

X = 8% + 1.25 * 7% = 16.75%

at 16%, X having a negative alpha is as follows:

16% - 16.75% = - 0.75%