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Alpha and Beta of Stock

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1) Stock A has an estimated rate of return of 12% and a beta of 1.2. The market expected rate of return is 12% and the risk-free rate is 2%. The alpha of the stock is:
1. 0% 2. -2% 3. 2% 4. 4%

2) Stock A has an expected rate of return of 14%. The market expected rate of return is 12% and the risk-free rate is 2%. The beta of the stock is __________.
1. 1.2 2. 1.0 3. 0.8 4. 0.6

3) A portfolio is composed of two stocks, A and B. Stock A has an expected return of 10%, while stock B has an expected return of 18%. What is the proportion of stock A in the portfolio, so that the expected return of the portfolio is 16.4%?
1. 0.2 2. 0.8 3. 0.4 4. 0.6

4) The expected market rate of return is 14%, while the risk-free rate of expected return is 4%. If you expect stock A with a beta of 1.2 to offer a rate of return of 20%, then you should __________.
buy stock A because it is overpriced
buy stock A because it is underpriced
sell short stock A because it is overpriced
sell short stock A because it is underpriced

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Solution Summary

Calculates alpha, beta, and proportion of stock in a portfolio.

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1) Stock A has an estimated rate of return of 12% and a beta of 1.2. The market expected rate of return is 12% and the risk-free rate is 2%. The alpha of the stock is:

1. 0% 2. -2% 3. 2% 4. 4%

Answer: 2. -2%
(R-Rf) = alpha + beta x (Rm-Rf)
(12%-2%) = alpha + 1.2x (12%-2%)
Or 10% = alpha + 12%
Or alpha = 10% - 12% = -2%

2) Stock A has an expected rate of return of 14%. The market expected rate of return is 12% and the ...

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