Consider an asset that has a beta of 1.5. The return on the risk-free asset is 6.5 percent and the expected return on the stock index is 15 percent. The estimated return on the asset is 20 percent. Calculate the alpha for the asset.
A) 19.25 percent
B) 0.75 percent
C) -0.75 percent
D) 9.75 percent
E) 9.0 percent

Question

Quizplus · Accepted Answer

Alpha is calculated using the formula: Alpha = Actual Return - Expected Return (based on CAPM). Expected Return (CAPM) = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate) = 6.5% + 1.5 * (15% - 6.5%) = 6.5% + 1.5 * 8.5% = 6.5% + 12.75% = 19.25%. Thus, Alpha = 20% - 19.25% = 0.75%.

Consider an Asset That Has a Beta of 1