Question

A stock has n HPR of 16%. The stock's beta is 0.83. The risk-free rate is 1% and the market risk premium is 5.25%. What ...


A stock has n HPR of 16%. The stock's beta is 0.83. The risk-free rate is 1% and the market risk premium is 5.25%. What is the stock's alpha? Answer as a percent.
Transcribed: A stock hasn HPR of 16%. The stock's beta is 0.83. The risk-free rate is 1% and the market risk premium is 5.25%. What is the stock's alpha? Answer as a percent.

Answer

Stock's beta (b) = 0.83

Risk free rate (Rf) = 0.01

Market risk premium (Mp) = 0.0525

HPR (Actual return) = 0.16

Expected return = ?

Stock's alpha = ?

Formula;

Expected return = Rf + b * Mp

 

Expected return = 0.01 + 0.83 * 0.0525

Expected return = 0.01 + 0.043575

Expected return = 0.053575

Expected return = 5.3575%

Formula;

Stock's alpha = Actual return - Expected return

 

Stock's alpha = 0.16 - 0.053575

Stock's alpha = 0.106425

Stock's alpha = 10.6425% or 10.64% (Approx)

 

  • Therefore Stock's alpha = 10.6425% or 10.64% (Approx)
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