Question

1. Assume the following: Realized risk-free rate, rf = 3% Realized return of the market, rM = 11% Beta for Stock i, βi = 0.90 Realized return for Stock i over the entire year is 10% (i.e. ri = 10%) At the end of the year, what is the stock’s realized alpha, α? (i.e. return above or below what CAPM anticipated) What does this tell you about the impact on stock I’s value resulting from managerial actions and/or other firm-specific events?

Answer 1

Alpha of portfolio = Actual rate of return – Expected Rate of Return

actual reare of return =10%-10.72% = -.72%

expected rate of return =risk free rate+(market return-risk free rate)*beta

3%+(11%-3%)*.9 = 10.72%

This shows an negative impact of managerial actions or other firm specific events on the company performance because a negative alpha value indicates that actual rate of return is less than the expected rate of return and this may be due to some of managerial actions or other firm specific events