Question

The expected return on the market portfolio is 19%. The risk-free rate is 12%. The expected return on SDA Corp. common stock is 18%. The beta of SDA Corp. common stock is 1.40. Within the context of the capital asset pricing model, _________.

Answer 1

Answer:

SDA Corp. Stock Alpha is 3.80%

Explanation:

If we calculate the expected return on SDA Corp. stock through Capital asset pricing model, we will get:

CAPM = Risk Free Rate + (Return on market portfolio - Risk free rate) * Beta

CAPM = Rf + (Rm - Rf)*β

CAPM = 12% + (19% - 12%)*1.40

CAPM = 12% + 9.8%

CAPM = 21.8%

The expected return on stock through CAPM is 21.8%, whereas, the expected return of SDA Corp. common stock is 18%. Therefore, the stock Alpha is 21.8% - 18% = 3.80%