Security A has an expected rate of return of 0.10 and a beta of 1.3. The market expected rate of return is 0.10, and the risk-free rate is 0.04. The alpha of the stock is
A) 1.7%.
B) −1.8%.
C) 8.3%.
D) 5.5%.

Question

Quizplus · Accepted Answer

Alpha is calculated using the formula: Alpha = Actual Return - Expected Return (based on CAPM). The CAPM expected return is calculated as: Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). For Security A, this is: 0.04 + 1.3 * (0.10 - 0.04) = 0.118 or 11.8%. The actual return is 10%, so the alpha is 10% - 11.8% = -1.8%.

Security a Has an Expected Rate of Return of 0