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Consider the single-index model. The alpha of a stock is 3.75%. The return on the market index is 11%. The risk-free rate of return is 2.5%. During a sample period, the stock earns a return that exceeds the risk-free rate by 13%, and there is no firm-specific residual affecting the stocks return (ie e = 0). The β of the stock is
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The problem asks us to determine the stock's beta in a single-index model. We are given: alpha = 3.75%, market return R_m = 11%, risk-free rate R_f = 2.5%, and the stock’s realized return exceeded the risk-free by 13% with no residual e = 0.
First, recognize the single-index......Login to view full explanationLog in for full answers
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