Question

Suppose the return on the market is expected to be 7%, a stock has a beta of 1.5, and T-bill rate is 3%. The SML would predict an expected return on the stocks of 9%. If you believe the stock will provide instead a return 11%. Its implied alpha is

Answer 1

Answer:

2%.

Explanation:

Calculation of the alpha of the stock

Implied Alpha Formula = Actual return - Expected return as per CAPM

Implied Alpha = 11% - 9%

Implied Alpha = 2%

Since you believe the stock will provide instead a return 11%, its implied alpha will be 2%.