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%

Question

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%

BlackTom AI · Accepted Answer

The question asks us to evaluate stock alphas based on beta and the market's expected return using the CAPM framework. Alpha is the portion of a stock's return that cannot be explained by its systematic risk; mathematically, alpha = actual return − [risk-free rate + beta × (market return − risk-free rate)]. Although the exact beta, market return, and risk-free rate are not provided in the prompt, we can still reason about what the signs and magnitudes of alpha imply.

Option group for Stock A:
- If Stock A's alpha is 3%, this means Stock A outperformed its CAPM-implied expected return by 3 percentage points. In other words, after accounting for beta exposure to the market, Stock A contributed an extra 3% in return beyond what the CAPM would predict. This positive alpha suggests favorable stock-specific performance or mispricing relative to its beta.
- If Stock A's alpha were any other value among the choices, such as −3%, −1%, or 1%, each would imply a different level of outperformance or underperformance. A negative alpha (e.g., −3% or −1%) would indicate underperformance relative to CAPM, while a smaller positive alpha (e.g., 1%) would indicate only a modest outperformance. The magnitude matters for assessing how strong the stock’s idiosyncratic performance is.

Option group for Stock B:
- If Stock B's alpha is −2.8%, this indicates Stock B underperformed its CAPM-implied expected return by 2.8 percentage points. In practical terms, after adjusting for its beta exposure, Stock B delivered a return that was 2.8% lower than what the CAPM would predict, signaling stock-specific challenges or inefficiencies not captured by market risk alone.
- Conversely, a positive alpha (e.g., 2.8%, 6%, etc.) would mean Stock B did better than the CAPM expectation by that amount, reflecting favorable idiosyncratic performance. A larger negative alpha would imply stronger underperformance, while a near-zero alpha would suggest returns are well explained by beta and market movements.

Important caveat: without the actual numeric inputs—namely the stock betas, the risk-free rate, and the market expected return—we cannot verify these alphas or reproduce the calculation. The CAPM-based alpha depends on all three components; different combinations could yield the same alpha, but the interpretation in terms of outperformance or underperformance remains consistent: positive alpha = overperformance vs. CAPM; negative alpha = underperformance vs. CAPM.

Summary interpretation:
- For Stock A, a 3% alpha indicates a positive idiosyncratic performance relative to the market-adjusted expectation.
- For Stock B, a −2.8% alpha signals underperformance relative to the CAPM expectation after accounting for beta exposure.

Note: If there were alternative options for either stock, each would imply a different level or sign of deviation from CAPM expectations, and the qualitative interpretation would follow the sign and magnitude of the alpha.

COMM_V 298 101 102 103 2025W1 Class 16 Practice Quiz

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%

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 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

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.

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