You have been provided with the following information:

XYZ Limited stock has a beta of 1.50
Market participants believe that XYZ stock will offer an expected return of 18%
The expected market return (Rm) is 10%
The risk-free rat (Rf) is 5%

What is the amount of XYZ's alpha?

Round your answer to a percentage with two decimal places and do not use the “%” sign, i.e. if the answer is 1.23% then write 1.23

Include a negative sign if your answer is negative.

Question

You have been provided with the following information:

XYZ Limited stock has a beta of 1.50
Market participants believe that XYZ stock will offer an expected return of 18% 
The expected market return (Rm) is 10%
The risk-free rat (Rf) is 5%

What is the amount of XYZ's alpha?

Round your answer to a percentage with two decimal places and do not use the “%” sign, i.e. if the answer is 1.23% then write 1.23

Include a negative sign if your answer is negative.

BlackTom AI · Accepted Answer

We start by identifying the information given and the definition of alpha in the CAPM framework. Beta (β) = 1.50, the expected return for XYZ is 18%, the expected market return Rm = 10%, and the risk-free rate Rf = 5%. Alpha in the CAPM context is defined as the intercept in the CAPM equation: E[Ri] − Rf = αi + βi · (E[Rm] − Rf).

First, compute the market risk premium: E[Rm] − Rf = 10% − 5% = 5%.

Next, compute the CAPM expected return for XYZ using the beta: CAPM(Ri) = Rf + β × (E[Rm] − Rf) = 5% + 1.50 × 5% = 5% + 7.5% = 12.5%.

Then, determine alpha from the equation by rearranging: αi = [E[Ri] − Rf] − βi × (E[Rm] − Rf).

Calculate each term: E[Ri] − Rf = 18% − 5% = 13%, and βi × (E[Rm] − Rf) = 1.50 × 5% = 7.5%.

Subtract to find alpha: αi = 13% − 7.5% = 5.5%.

In decimal form, this is 0.055. Since the instruction asks for a percentage with two decimals and without the percent sign, the value would be represented as 5.50. However, note that the instruction also says to include a negative sign if the answer is negative; since this result is positive, no negative sign is needed.

To verify intuition: a positive alpha indicates XYZ delivered more return than what CAPM would predict given its beta and the market conditions, consistent with the observed 18% return being above the 12.5% CAPM expectation.

If you were asked to round or format differently, you would still base α on the CAPM decomposition above, making sure to keep two decimal places in the final presentation.

COMM_V 298 201-207 2024W2 2024W2 COMM 298 Final Exam April 24, 2025 - Requires Respondus LockDown Browser

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