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

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BlackTom AI · Accepted Answer

To begin, identify the key values given: the stock's expected excess return is 12% (0.12), the stock's beta is 1.25, the market portfolio's expected return is 8% (0.08), and the risk-free rate is 2% (0.02).

Recall the CAPM relationship adjusted for alpha: E[R_x] - R_f = β_x * (E[R_m] - R_f) + α.

First compute the market risk premium: E[R_m] - R_f = 0.08 - 0.02 = 0.06 (6%).

Next, multiply the stock's beta by the market premium: β_x * (E[R_m] - R_f) = 1.25 * 0.06 = 0.075 (7.5%).

Now use the given stock excess return to solve for alpha: 0.12 (stock excess) = 0.075 (CAPM portion) + α, so α = 0.12 - 0.075 = 0.045.

Expressing alpha in decimal form as required: α = 0.0450, which corresponds to 4.50%.

FINS2624-Portfolio Mgmt - T1 2025

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

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