Security A has an expected rate of return of 15% and a beta of 1

Finance Oct 15, 2020

Security A has an expected rate of return of 15% and a beta of 1.60. The market expected rate of return is 10% and the risk-free rate is 2%. The alpha of the stock is ...............

Expert Solution

Computation of Alpha of Stock:

r = R_f + Beta * (R_m - R_f ) + alpha

Here,

r = the security's or portfolio's return

R_f = the risk-free rate of return

beta = the security's or portfolio's price volatility relative to the overall market

R_m = the market return

Alpha = 0.15-0.02-1.6*(0.10-0.02)

= 0.13 - 0.1280

Alpha = 0.0020 or 0.20%

= 0.20% is the alpha of the stock

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