Question

Stock A has a market beta of 1.5, and stock B has a market beta of 0.8.

If the market realizes a return of -1% over a certain period:

What is the expected return of stock B over the same period predicted by the single index model ?
%  (1 decimal place)
If stock B instead realized a return of 1%, what is the alpha of stock B over that period?
%  (1 decimal place)

Answer 1

(a)
Stock B Market Beta =			0.8
Market realized return =			-1%
Expected return as per single index model formula = Beta * Market realized return
Stock B Exp. return = 0.8 * -1%
-0.80%
So, Expected return of Stock B is -0.80%
(b)
Actual return of stock B =			1%
Alpha formula = Actual return - Expected return
Alpha = 1% - (-0.8%)
Alpha = 1.8%
So, Alpha of stock B is 1.8%