Security A has an expected rate of return of 12% and a beta of 1.1. The market expected rate of return is 8%, and the risk-free rate is 5%. The alpha of the stock is .

The alpha of the stock is 3.7%.

Explanation:

Alpha is the abnormal or additional return expected or received on a stock in excess of the required rate of return for such a stock as calculated by the Security market line or Capital asset pricing model equation.

We first need to calculate the required rate of return for such a stock and then deduct that rate from the expected rate of return to reach at alpha or the abnormal return.

The abnormal return or alpha for such a stock is,

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