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27 March, 20:44

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 __.

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  1. 27 March, 20:46
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    1.7%

    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%
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