Question

14. Security A has an expected rate of return of 12% and a beta of 1.10. The market expected rate of return is 8% and the risk-free rate is 5%. The alpha of the stock is _________. A. -1.7% B. 3.7% C. 5.5% D. 8.7%

Answer 1

B. 3.7%

Step-by-step explanation:

As per the CAPM, Expected return = Risk-free rate + Beta*(Expected return on the market - Risk-free rate)

Expected return% = 5% + 1.1% * (8% - 5%)

Expected return% = 5% + 1.1% *3%

Expected return% = 5% + 3.3%

Expected return% = 8.3 %

The alpha of the stock = Excess return

Excess return = 12% - 8.3%

Excess return = 3.7%