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26 March, 13:27

You run a regression of a stock's excess return on the market excess return and obtain the following results: E left square bracket R subscript i vertical line space R subscript M right square bracket space equals space 0.4 plus 0.7 asterisk times R subscript M With an R-square of 0.12. The alpha of the stock is

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  1. 26 March, 17:18
    0
    7%

    Explanation:

    Data provided as per the question

    Risk free rate = 0.4

    Beta = 0.7

    The computation of alpha of the stock is shown below:-

    Expected return = Risk free rate + (Beta * Market rate of return)

    Expected return = 0.4 + (0.7 * Market rate of return)

    = 0.7

    or 7%

    Therefore for computing the alpha of the stock, we have applied the above formula.
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