Suppose Boeing stock has a market beta of 1.75 and an expected return of 8%. Suppose the stock market has an expected return of 6%, and the risk-free rate is 2%. What is the CAPM alpha of Boeing stock? Assume the stock market is representative of the entire market portfolio.

Question

BlackTom AI · Accepted Answer

Let’s walk through the CAPM framework step by step and then evaluate each answer choice.
First, note the given values: beta of Boeing, β = 1.75; stock’s expected return E[R_i] = 8%; market expected return E[R_m] = 6%; risk-free rate R_f = 2%. The CAPM formula gives the required or expected return under CAPM as E[R_i(CAPM)] = R_f + β × (E[R_m] − R_f).
Compute the market risk premium: E[R_m] − R_f = 6% − 2% = 4%.
Multiply by beta: β × (E[R_m] − R_f) = 1.75 × 4% = 7%.
Add the risk-free rate: E[R_i(CAPM)] = 2% + 7% = 9%.
Now, CAPM alpha is defined as the actual expected return minus the CAPM-predicted return: α = E[R_i] − E[R_i(CAPM)] = 8% − 9% = −1%.
Option-by-option analysis:
- Option "-1%": This exactly matches the computed alpha of −1%, which arises from Boeing’s actual expected return being 1 percentage point below its CAPM-predicted return.
- Option "0%": This would imply Boeing’s actual return perfectly matched the CAPM expectation, which is contradicted by the calculation showing a 9% CAPM return versus an 8% actual.
- Option "2%": A positive 2% alpha would mean actual return exceeds CAPM by 2 percentage points, but the math shows a shortfall, not a surplus.
- Option "None of the above": Since we have a valid numeric result (−1%), this option is incorrect.
In summary, the CAPM framework yields a predicted return of 9%, the actual return is 8%, and the resulting alpha is −1%, making the first option the correct characterization of Boeing’s CAPM alpha.

MBA Exemption Exam Fall 2025 Entry Capital Markets Exemption Exam AY2025-2026 (Remotely Proctored)

Suppose Boeing stock has a market beta of 1.75 and an expected return of 8%. Suppose the stock market has an expected return of 6%, and the risk-free rate is 2%. What is the CAPM alpha of Boeing stock? Assume the stock market is representative of the entire market portfolio.

View Explanation

Log in for full answers

Similar Questions

Part 1 of 4: Based on the stock's beta and market expected return, stock A's alpha is: [ Select ] 1% 3% -1% -3% Based on the stock's beta and market expected return, stock B's alpha is: [ Select ] 2.8% -6% -2.8% 6%

Part 1 of 4: Based on the stock's beta and market expected return, stock A's alpha is: [ Select ] 3% -3% -1% 1% Based on the stock's beta and market expected return, stock B's alpha is: [ Select ] -6% 2.8% 6% -2.8%

Part 2 of 3: If the Stock X's beta is 0.8, the expected return of the market is 15% and the risk free rate is 5%, what is Stock X's alpha? Round your answer to four decimals. DO NOT use percentage format. E.g. 10.51% should be entered as 0.1051

Stock X has an expected excess return of 12% and its beta is 1.25. The Market portfolio expected return is 8% and the risk-free rate is 2%. What is the alpha of Stock X? Enter your answer to 4 decimal places eg if your answer is 1.44% enter as 0.0144 If your answer is 1% enter as 0.0100

Part 1 of 4: Based on the stock's beta and market expected return, stock A's alpha is: 3% Based on the stock's beta and market expected return, stock B's alpha is: -2.8%

More Practical Tools for Students Powered by AI Study Helper

Homework AI Solver

Stylized AI Paper Writer

Plagiarism Checker Assistant

Citation AI Academic Writing Tool

In-Class Translation Assistant

AI Note Generator

AI Quiz Answers

Past Exam Questions from University Test Bank

Smart Practice Assistant

Adaptive Practice

Making Your Study Simpler