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 share is ________.
A)-1.7%
B)3.7%
C)5.5%
D)8.7%

Question

Quizplus · Accepted Answer

To calculate alpha, we use the formula: 
Alpha = Expected return - (Risk-free rate + Beta*(Expected market return - Risk-free rate))

Substituting the values, we get:
Alpha = 12% - (5% + 1.10*(8% - 5%))
Alpha = 3.7%

Therefore, the alpha of the share is 3.7% and the correct choice is B.

Security a Has an Expected Rate of Return of 12