Question

The market expects a stock to return 14.54% over then next year. The stock's beta is 0.84. If the risk-free is 1.87% and the market risk premium is 5.22%, what is the stock's alpha?

Your father asked for your help. He has been offered an annuity that will pay him $1,566 per month for 23 years. He thinks that the fair return should be 4.37%. What is the most he should be willing to pay for it today? Enter only numbers and decimals in your response. Round to 2 decimal places.

A stock is currently selling for $90.3 and is expected to sell for $108.51 in 1 year. If the company pays a dividend of $0.75 what is the stock's HPR? Convert to a percent. enter only numbers and decimals in your response. Use at least two decimal places.  For example, if your calcualtor displays .10067, then your answer should be 10.07 or 10.067

The rate of interest on Federal government debt borrowed in 2020 is 2.75%. If you borrow $14,618 by the time you graduate and rates stay the same, what will be your monthly payment if you want to pay it off in 8 years?

A stock has a beta of 1.34. The risk free rate is 1.101% and the market risk premium is 5%. What is the fair return on the stock? Answer as a percent. Use at least 2 decimal places in your response.  Enter only numbers and decimals.

Answer 1

Since there are multiple questions here, I am answering the first question in order to follow the guidelines provided.

1. Alpha is used to measure the performance of a stock in comparison with the market performance. Therefore, alpha is measured by the formula given below:

Alpha = Actual rate of return - Expected rate of return

We use CAPM model to calculate the returns expected by the investors on a stock for the risk taken by them. Using CAPM model:

Expected return = Risk free return + Beta (Risk premium - Risk free return)

= 1.87% + 0.84 (5.22% - 1.87%)

= 1.87% + 2.814%

= 4.684%

Using this value for calculating Alpha:

Alpha = 14.54% - 4.684%

= 9.856%

Since Alpha is positive, it reflects that the particular stock has ouperformed the market.