Question

You run a regression of a stock’s excess return on the market excess return and obtain the following results: E left square bracket R subscript i vertical line space R subscript M right square bracket space equals space 0.4 plus 0.7 asterisk times R subscript M With an R-square of 0.12. The alpha of the stock is

Answer 1

7%

Step-by-step explanation:

Data provided as per the question

Risk free rate = 0.4

Beta = 0.7

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

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

Expected return = 0.4 + (0.7 × Market rate of return)

= 0.7

or 7%

Therefore for computing the alpha of the stock, we have applied the above formula.