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
A)1.7%.
B)-1.7%.
C)8.3%.
D)5.5%.
E)none of the above.

Question

Quizplus · Accepted Answer

The alpha of the stock is calculated as the difference between the expected return and the required return (CAPM). Required return = 0.05 + 1.1*(0.08 - 0.05) = 0.083. Alpha = 0.10 - 0.083 = 0.017 or 1.7%.

A Security Has an Expected Rate of Return of 0